In a new set of clarifications for banking, insurance and stock brokers sectors, the government clarified that free banking services, like ATM withdrawals, will not attract GST, but late payment charges on outstanding credit card bills and purchase of insurance policies by NRIs will be chargeable under GST.
The FAQs said that services supplied without consideration to related persons or distinct persons only would qualify as ‘supply’ and hence, attract GST.
Tax experts, however, said that though this puts to rest the confusion about the applicability of GST on free services but it may not impact the recently issued notices for levy of service tax on maintenance of minimum balance in bank accounts. “This clarification is for levy of GST on free banking services. The notices have been issued on the premise that there is a hidden consideration in the interest earned on maintenance of minimum balance in accounts. Those services are being seen free conditional to maintenance of minimum balance in the bank accounts,” said a tax expert on the condition of anonymity.
Last month, the Department of Financial Services had approached the revenue department seeking exemption of these transactions from GST after some banks received service tax notices for free services offered to their clients on maintenance of minimum balance in their bank accounts.
The FAQs also clarified that transactions relating to securitisation, derivatives, future and forward contracts are exempt from GST. Also, services provided by banks to RBI would be taxable as these are not excluded from the purview of GST, it said.
On the levy of GST on insurance policies purchased by non-resident Indians (NRIs), it said the amounts paid from Non-Resident External Accounts are paid in Indian Rupees and are not received in convertible foreign exchange. “Therefore, the conditions for export of services as provided under section 2(6) of IGST Act, 2017 are not satisfied. Life Insurance services in such cases would be treated as inter-State supplies and subject to GST,” it said.
On whether GST will be levied on the exit-load on mutual funds, the department said exit load in the form of a fee (whether or not as a fixed percentage of the investment) is liable to GST. “Even if the exit load is in the form of units in the fund, it may be concluded that the consideration received in money was later converted to NAV units,” the FAQs said.
Besides, late payment of dues on credit card outstanding as well as interest on a finance lease transaction is taxable under GST.
The FAQs explained finance lease as a method of borrowing against the asset. The interest represents the time value of the money expended by the Bank in financing the asset.
PwC Partner & Leader, Indirect Tax, Pratik Jain said the FAQs are very significant as globally the financial service sector is considered as most complex from GST standpoint. “Transactions relating to securitisation, derivatives, future and forward contracts have been clarified to be exempt from GST, which have been debated since introduction of GST. While few aspects such as taxability of transactions between Indian and overseas offices of same bank still need some more clarity, industry would welcome the government’s initiative,” Jain said.
Clarifications around services provided by multiple branches and to multiple locations of customers would provide much needed certainty to the industry and reduces the possibility of litigation. “One would hope that similar detailed clarifications would be issued by other sectoral committees as well,” he said.