Free services provided by banks to customers who maintain a minimum balance account will not be liable to the Goods and Services Tax, the government clarified in a Frequently Asked Questions document. This comes after the government had earlier asked banks to pay service tax and GST retrospectively on free services provided to select customers.
Show cause notices were issued by the Directorate General of Goods and Services Tax Intelligence asking banks to pay back-taxes on free services provided by them since 2012. BloombergQuint had reported on May 8 that government may withdraw these notices.
“…where the services are supplied by a supplier without consideration to an unrelated recipient or a person other than a related or distinct person, the same would not amount to supply and not liable to GST,” says the new document.
Pratik Jain, leader-indirect taxes at PwC India said that while the FAQs clarify that free services provided by banks are not liable to GST, it is unclear whether the show cause notices issued to banks under service tax are withdrawn or adjudication will be continued.
The government is yet to clarify what the stated position in the service tax regime would be, as the notices had asked banks to pay tax retrospectively.
The tax liability of banks due to these notices was around Rs 45,000 crore, according to news reports. A bulk of this tax demand is of service tax, and the FAQs so far clarity the government’s stated position only under the GST regime.
The document also says that services provided by banks to offshore clients would be considered as intra-state supply, the place of supply would be considered as the location of the bank, and IGST would be levied on these services. The state in which the bank providing the service is based will get the share of IGST.
Late payment of dues on credit card outstanding will be chargeable to GST, while free cheque book issuances will not attract GST, the document says.
Derivatives To Be Exempt
As derivatives fall under the definition of securities, they are not liable to GST, says the FAQ document. Securities are neither classified as goods nor services and are therefore exempt from GST. However, if some service charges, documentation fees or broking charges need to be paid, the same would be liable to GST. Since futures contracts are also financial derivatives, whose price is determined by an underlying securities instrument, they will not be liable to GST, according to the same FAQs.
However, futures contracts also have a delivery option, and if the settlement of contract takes place by the way of actual delivery of underlying commodity or currency, then such contract would be treated as a normal supply of goods, and be liable to GST.
In case forward contracts, if the settlement takes place by way of net settlement of differential of the forward rate over the prevailing market rate on the settlement date, then such contracts will not be taxable under GST. In such a case forward contracts will be classified as securities. A forward contract is an agreement to purchase or sell a said quantity of a commodity or currency at a pre-determined future date and price.