A Brief Overview on Applicability of GST on NBFCs

Ashish M. Shaji

25 May, 2023

The induction of Goods and Services Tax (GST) in India is a significant shift from the current tax regime. It is presumed that the service sector shall have a major impact on GST than the manufacturing or the trading sector. In this article, we shall have a brief discussion on the applicability of GST on NBFCs (Non-Banking Financial Companies), but before that, let’s have a concise understanding of GST.

Meaning of Goods and Services Tax (GST)

GST stands for Goods and Services Tax. It is an indirect tax that has eliminated other indirect taxes in India. It is a comprehensive and destination-based tax in India that was passed by the parliament in March 2017 but came into existence in July 2017. GST is levied on every value addition. It shall be imposed on every stage of a sale.

Provisions of GST on NBFCs

Some of the notable provisions are as follows:

• Services provided are taxable at 18% after the introduction of the GST, whereas earlier it was 15% service tax.
• Now, one is required to obtain state-wise registration of GST where they have branches, whereas earlier centralized registration was required.
• Inter-state supply of services between the branches of the same entity shall also attract IGST (Integrated Goods and Services Tax).
• 37 returns for each state, whereas 61 returns in case of ISD (Input Service Distributor) and TDS (Tax Deducted at Source) provision are applicable.

Essential aspects relating to GST on NBFCs

• Place of supply

The place of the supply of banking and other financial services like stockbroking services to any person must be at the location of the recipient of services on the supplier of services record. As per section 12(12) of the IGST (Integrated Goods and Services Tax) Act 2017 in case the place of the recipient of services is not on the supplier’s record, then the place of supply shall be the location for the supplier of services.

• Input credit tax

Section 17 of the CGST (Central Goods and Service Tax) Act provides for two options for input credit tax. These are:

1. Every month avail an amount equal to 50% of eligible input tax credit on inputs, capital goods and input services in that month. The rest shall be lapsed according to the rule 3 of ITC (Input Tax Credit);
2. As per section 17(2) of CGST (Central Goods and Service Tax) Act and rule 7 of the ITC (Input Tax Credit), take input tax as is attributable to the taxable supply only and not for exempted supply.

GST on NBFCs

• Applicability
• Complete Overview

Download PDF

Input Tax Credit Rule -3

A Non-Banking Financial Company conducting business in the supply of services by accepting deposits or extending loans cannot avail the credit of tax paid on input services that have been used for non-business purposes. Apart from that, under sub-section (5) of section 17, it shall not be given a credit attributable to supplies.

The Non-Banking Financial institution will, as per sub-section (4) of section 17, avail the credit of tax paid on inputs and services. From the remaining amount of input tax, 50% will be the input tax credit admissible for the company, and it must be furnished in Form GSTR-2.

Reference of Section 17 (2) of CGST (Central Goods and Service Tax) Act 2017, for understanding GST on NBFCs

In case the goods or services or both are utilized by the registered person partly in order to effect taxable supplies including zero-rated supplies under the CGST (Central Goods and Service Tax) Act or under the IGST (Integrated Goods and Services Tax) Act and partly for effecting exempt supplies under both the Acts, the amount of credit would be restricted to so much of the input tax as is attributable to the said taxable supplies including the zero-rated supplies.

Reference of Section 17 (4) of CGST (Central Goods and Service Tax) Act 2017, for understanding GST on NBFCs

A banking company or any financial institution including a Non-Banking Financial Company, engaged in supplying services through accepting deposits, extending loans or advances will have the option to comply with the provisions of sub-section (2) or avail of every month an amount equal to 50% of the input tax credits eligible on inputs, capital goods and input services in the month. The rest shall be lapsed provided:

• That the option exercised once will not be withdrawn during the remaining of the financial year;
• That the restriction of 50% will not apply to the tax, which is paid on the supplies made by one registered person to other registered persons having a similar Permanent Account Number.

Benefits of applicability of GST on NBFCs

The benefits of the application of GST on NBFCs (Non-Banking Financial Companies) are as follows:

• The GST Goods and Services Tax has merged all the different indirect taxes like the state cess, purchase tax, excise duty, sales tax, etc.
• Since GST is based on digital compliance and return filing, therefore, the NBFCs can ensure that their GST return filing and other compliances are addressed without any obstacle.
• The concept of Goods and Service Tax requires only such businesses that have an annual turnover of twenty lakh rupees for GST registration in India. Hence it allows lending businesses operating at a small scale to get an exemption from obtaining tax registration and further reduce their operational costs to a significant amount. 

Conclusion- GST on NBFC

The current tax regime under GST has affected the manner of working of the Non-Banking Financial Companies. It has benefitted from it, but at the same time, the challenges faced by the lending sector cannot be ignored. One can expect more governmental reforms that may alleviate tax burdens on the Non-Banking Financial Companies in India.