Impact of GST on financial services     

Introduction of goods and services tax (GST) is now a certainty, though the timing is currently being debated. Given that it is a transaction tax it would impact each industry or sector in its own way, as every sector will have some unique features in its business model.

As regards the financial services sector, one of the key impact areas would be the treatment of fund-based activities. Currently, all fee-based activities are generally liable to service tax. They include various types of charges or transaction fees levied on a per unit or lump-sum basis. However, income from fund-based activities such as interest, investment and asset financing, proprietor trading etc are largely out of the tax net (except for 10% of the interest earned in a financial leasing transaction). It is expected that GST would be an all-encompassing levy and tax may apply on all services, with a specific list of exclusions. Also, if one looks at some international precedents on what is the definition of “services”, say the EU VAT laws, the term is defined to include all transactions that are not regarded as supply of “goods”. Thus, it would be important for fund-based activities to be a part of the list of exclusions to have the effect of continuing the current “no-tax” situation.

Another change expected for service providers in this sector would be the introduction of Place of Supply Rules. These rules are expected to define the taxing jurisdiction of a particular service. One of the features of the dual-GST proposed by the empowered committee is that both the Centre and state governments would levy tax on supply of services. Given this, Place of Supply Rules would help determine the appropriate state to levy GST on a particular service. Another outcome of the dual structure is the requirement to maintain separate credit pools for CGST and SGST. The current input credit mechanism would be replaced by a new system. It is expected that the definition of input would get wider as GST merges several (present) taxes on goods and services. This would mean that the entire case bank on interpretation of current regulations would have to be re-built. With IGST also proposed to be treated as a separate pool, with protocol as to when can credits be used across pools, taxpayer would have to deal with three different streams of credit.

In terms of transitioning to GST, it is hoped that credits accumulated and unutilised as on the date of change are allowed to be carried over and used without restrictions. In addition, in the present regime, service providers are not eligible to claim credit of the VAT paid on goods required for provision of such output services. This will change under GST. Moreover, the service provider will also be required to pay GST on disposal of assets. In this regard, it is hoped that the government allows service providers to avail credit of VAT paid on the goods lying with the service provider as on the date of transition, again freely offset-able in future. All in all, the sector appears to have various touch-points of impact with this changeover to GST. Appropriate preparedness would be paramount to capitalise on opportunities in a timely manner as also to mitigate risks.

Source : Financial Express, India, dated 07/12/2009