GST on Financial Services – Goods and Service Tax Regime
India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. Financial Services cover the functioning of Banks, Financial Institutions, Insurance Companies and the National Pension System.
The Department of Financial Services (DFS) of India oversees several key programs/initiatives and reforms relating to Financial Inclusion, Social Security, Insurance as a Risk Transfer mechanism and Credit Flow to the key sectors of the economy/ farmers/ common man. Finance is one the sectors that forms the basis for all other sectors of the economy. Without finance, no business is possible to start or run fruitfully in the long run. Due to the importance of finance that this sector carries all other sectors, the Government of India has very carefully set the GST rates for the various financial services being provided in the country.
According to the Section 65 (12) of Finance Act, 1994 as amended “Banking and Other Financial Services” means –
(a) The following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or [commercial concern]*, namely:-
(i) financial leasing services including equipment leasing and hire-purchase;
Explanation.-For the purposes of this item, “financial leasing” means a lease transaction where-
- contract for lease is entered into between parties for leasing of a specific asset;
- such contract is for use and occupation of the asset by the lessee;
- the lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and
- the lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment;
(iii) Merchant banking services;
(iv) Securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing;
(v) Asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services;
(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;
(vii) provision and transfer of information and data processing; and
(viii) banker to an issue services; and
(ix) other financial services, namely, lending, issue of pay order, demand draft, cheque, letter of credit and bill of exchange, transfer of money including telegraphic transfer, mail transfer and electronic transfer, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults, operation of bank accounts;”
(b) foreign exchange broking and purchase or sale of foreign currency including money changing provided by a foreign exchange broker or and authorised dealer in foreign exchange or an authorised money changer, other than those covered under sub-clause (a).
GST rates for the various financial services
Under GST, there is no tax levied on the free services provided by the banks. Most of the items have been kept in the negative list as given below-
Negative List Items of Banking Services
|· Services by the Reserve Bank of India.
· Services by way of:
(a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services);
(b) inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers.
· Services by an acquiring bank, to any person in relation to settlement of an amount upto two thousand rupees in a single transaction transacted through credit card, debit card, charge card or other payment card service.
· Services by the following persons in respective capacities – (a) business facilitator or a business correspondent to a banking company with respect to accounts in its rural area branch; (b) any person as an intermediary to a business facilitator or a business correspondent with respect to services mentioned in entry (a); or (c) business facilitator or a business correspondent to an insurance company in a rural area.
· Services received by the Reserve Bank of India, from outside India in relation to management of foreign exchange reserves.
NEGATIVE LIST ITEMS OF INSURANCE SERVICES
|· Services of life insurance business provided by way of annuity under the National Pension System regulated by the Pension Fund Regulatory and Development Authority of India under the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013).
· any Services of life insurance business provided or agreed to be provided by the Army, Naval and Air Force Group Insurance Funds to members of the Army, Navy and Air Force, respectively, under the Group Insurance Schemes of the Central Government.
· Services by the Employees’ State Insurance Corporation to persons governed under the Employees’ State Insurance Act, 1948 (34 of 1948).
· or provided by the Insurance Regulatory and the Development Authority of India to insurers under the Insurance Regulatory and the Development Authority of India Act, 1999 (41 of 1999).
· any Services of general insurance business provided under following schemes – (a) Hut Insurance Scheme; (b) Cattle Insurance under Swarnajaynti Gram Swarozgar Yojna (earlier known as Integrated Rural Development Programme); (c) Scheme for Insurance of Tribals; (d) Janata Personal Accident Policy and Gramin Accident Policy; (e) Group Personal Accident Policy for Self-Employed Women; (f) Agricultural Pumpset and Failed Well Insurance; (g) premia collected on export credit insurance etc.
· the Services of life insurance business provided under following schemes- (a) Janashree Bima Yojana; (b) Aam Aadmi Bima Yojana; (c) Life micro-insurance product as approved by the Insurance Regulatory and Development Authority, having maximum amount of cover of fifty thousand rupees; (d) Varishtha Pension BimaYojana; (e) Pradhan Mantri Jeevan JyotiBimaYojana etc.
· Services provided to the Central Government, State Government, Union territory under any insurance scheme for which total premium is paid by the Central Government, State Government, Union territory.
NEGATIVE LIST ITEMS OF SERVICES PROVIDED IN STOCK MARKET
|· Services provided by the Securities and Exchange Board of India set up under the Securities and Exchange Board of India Act, 1992 (15 of 1992) by way of protecting the interests of investors in securities and to promote the development of, and to regulate, the securities market.||0%|
NEGATIVE LIST ITEMS OF PENSION AND PROVIDENT FUND SERVICES
|· Services provided by the Employees Provident Fund Organisation to the persons governed under the Employees Provident Funds and the Miscellaneous Provisions Act, 1952 (19 of 1952).
· the Services by way of collection of contribution under the Atal Pension Yojana, or under any pension scheme of the State Governments.
But GST rates will apply to some banking transactions, mutual funds, insurance and stock market where there is a supply for consideration. So in following cases GST would be levied-
- In banking transactions such as credit card payments, fund transfer, ATM transactions, processing fees on loans etc., where the banks are levying charges, tax rate of 18% would apply.
- GST will now apply to exit loads charged by mutual funds (MFs).
- the GST will also be applicable on default in payment of loan installments and credit card dues, Insurance policies for NRIs.
- GST is levied on the processing charges and any other charges paid to the bank excluding the principal repayment and interest payment. These other charges include the Loan Processing Fees, Loan Prepayment Charges and other charges, if any. Mentioned below are the important loans and their GST rates:
-Personal Loan– 18%
-Home Loans– 18%
-Car Loan– 18%
- Mutual fund distributors earning up to Rs20 lakh will remain exempt from GST, while those earning more will pay GST at the rate of 18%.
- A GST of 18% would be levied on the 3 types of life insurance :
-Term insurance plans- basic life insurance policies
-ULIPs–insurance and investment under a single integrated plan
-Endowments (including money-back)- life insurance policies that pay a lump sum on maturity/death or a fixed sum every month (sort of like a pension)
- General insurance includes fire insurance, marine insurance, car insurance, theft insurance etc. The GST rate will also be 18% on general insurance.
In a nutshell, Government has attempted to make most of the financial services exempt from GST. But services where there is supply for consideration, in those cases tax rate has been increased from 15% to 18%. This has resulted in increased cost of premium, increased loan charges etc. So the burden is being felt by the consumer. But government Bhas tried to enhance transparency, increase its revenues and keep the money circulating in the economy by bringing all indirect rates under one umbrella, thereby simplifying taxation of goods and services.
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The author of above article is Tanuja Puri, Assistant Professor.
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