Taxability of Income Earned by Bank under GST

Incomes are earned by banks from various sources other than interest. The interest income forms a major part of the incomes but in recent years due to globalization, such a scenario has been changed, and accordingly, the banking sector has involved themselves in numerous activities resulting in a variety of incomes. All such incomes are recorded in the books of accounts under various heads which we must analyze and decide taxability on the same.

The income so earned, and their taxability is as under:

Interest income

The income earned by way of grant of loans, deposits, etc. is a taxable supply. However, by virtue of entry 27(a) of NN 12/2017-CTR and entry 28(a)of NN 9/2017-ITR, no GST is payable on income earned by way of interest except interest income earned through credit card. The relevant extract of the said entry is as under:

Therefore, an audit from the perspective of GST into the same may be restricted to the fundamental question as to whether the income is rightly characterized as ‘interest’ to enjoy the exemption under GST or taxable like the income earned from credit card services.

Commission income

The instant income is classified as a supply of service transaction and accordingly would be classified in terms of the chapter heading as specified in the relevant notifications issued under GST.

Commission earned (on accrual) is liable to GST. For e.g.:

M/s. A Ltd. wants to invest in fixed securities/bonds which can be only routed through ICICI bank as they have exclusive rights for subscribing the same. ICICI bank gets a 2% commission on the amounts subscribed. For the period 2018-19, the bank earns Rs. 250 crores of commission from such subscription which is recorded as ‘Other Income’. The auditor must check whether GST is appropriately disbursed on the said amount. Whether payments are made by complying with the due date for payment of GST. Also, verify returns filed reveals the correct amount of liability. If the tax is not discharged, then appropriate disclosure regarding tax and interest would be required. Suitable disclosure as to whether any contingency exists in respect of the applicable penalty may also be provided. Further, a review of agreements where a commission is earned must be carried out thoroughly and if any milestone incentives, performance bonus, time bonus, etc., is provided then appropriate tax treatment should be suggested.

ICICI bank gets a 1% commission from private companies for providing them investment exposure in foreign markets. The same is liable for payment of GST and appropriate tax treatment should be followed and suggested. Disclosures, as discussed above, may be considered if any tax liability is found to be unpaid

Note – Where the investment activity is undertaken in another group company, but the banking entity provides leads to such investment activity for which it receives some (smaller) percent as commission, such transactions should be thoroughly analyzed, and proper movement of funds be tracked.

Brokerage income

The instant income is classified as a supply of service transaction and accordingly would be classified in terms of the chapter heading as specified in the relevant notifications issued under GST.

Agency charges

Generally, such income is earned by way of being appointed as an agent either by RBI, State Governments, Central Governments, or by some corporates. Under such arrangements, banks act as a facilitator/collection center, and in lieu of the provision of such services, banks collect certain fees as “Agency charges”. Such charges are liable for the payment of GST. Very often, the underlying arrangement will be of agency, but it may be described in a contemporary terminology like ‘enablement charge’ or ‘facilitation fee’ or simple ‘management fee’ which may appear misleading.

The auditor needs to analyze the relevant agreements entered and must study the flow of consideration and thereafter decide taxability and the amount on which GST is applicable. The same must be communicated to the management if no GST has been paid to date.

Portfolio management service:

Generally, the said services are being provided by different entities within the banking sector. Due to stiff competition and one-stop window for priority customers (i.e. customers who are depositing amount beyond a certain limit) only one person provides all such services and thereafter relevant commissions are split between entities or costs are shared. In fact, interbranch sharing of portfolio management services in lieu of the skill set available in selected branches between different States is taxable and a fair value must be assigned to such transaction and applicable GST is payable on such transaction. Further, the appropriate classification must be made for such a supply of services under relevant chapter heading as per the notifications issued under GST.

Account maintenance charges:

It is a common practice that in most of the bank’s certain charges are recovered towards maintenance. The said charges are nominal but the same is liable for payment of GST. Accordingly, the concerned concurrent /internal/statutory auditor would do well to check on this aspect of taxability and ensure compliance.

Further, even locker charges are being recovered from the customers on an annual basis which is liable for payment of GST. There can be different modes of arrangement for availing such income, but such income is taxable under GST.

The provisions relating to the place of supply will become imperative while determining the correct nature of the transaction and thereafter taxability must be decided. Further, the appropriate classification must be made for such a supply of services under relevant chapter heading as per the notifications issued under GST.

Credit/Debit card charges

Income earned by way of issuing and maintaining such transactions is liable for payment of GST. Therefore, the auditor should carefully examine such transactions and appropriate disclosures are made in case of non-compliance with relevant tax provisions.

Note- Fees charged for card settlement is a consideration that is part of a separate transaction between the banks which are parties to this transaction and shall be liable to GST. This is a B2B supply and credit of this transaction is available. In short, GST will be levied on interchange fees on card settlement fees paid/shared by banks.

Digital payment facilities

Banks charge some convenience fees from the person who accepts payment through debit card, credit card, or through other some other card service. The charges earned by the bank are liable to GST. However, nogs will be payable with respect to services provided by banks, to any person in relation to settlement of an amount up to ` 2000 in a single transaction transacted through credit card, debit card or charge card or other payment card service.

Sale and purchase of foreign currency:

Banking companies receiving consideration for providing services by way of securities; foreign exchange broking and purchase or sale of foreign currency, including money changing is chargeable to GST on the special value calculated as per option availed in terms of Rule 32 of CGST Rules.

However, pursuant to entry no. 27(b) of NN 12/2017-CTR and entry no.28(b)of NN 9/2017-ITR, inter-bank transactions of sale or purchase of foreign currency or transactions with authorized dealers of money changing are exemption under GST regime.

Other income

• Income earned by banks by way of penalties, retention charges, etc. are liable for payment of GST.

For e.g.:

• • IVY Bank charges Rs. 2500/- to all those customers who maintain an average quarterly balance below ` 25000/-. Accordingly, the total collection of income from such sources is Rs. 5,00,00,000/-, therefore IVY bank must discharge GST on the same at appropriate rate.

• • IVY Bank penalizes Rs. 500/- to all such customers whose cheques are bounced and the income collection for the period 2019-2020 is Rs. 50,00,000/-. IVY bank must discharge GST on the same at the appropriate rate.

• • IVY Bank charges Rs 50/- for issuing DD. Such income is liable for payment of GST and the auditor must scrutinize whether appropriate tax rate has been disbursed.

• The realization of payment from Non-Performing Assets (NPA) by way of disposal of NPA to an asset reconstruction company [ARC] or to another buyer is a debatable issue. However, as per the author’s opinion, the taxability depends upon the structuring of the transaction. As per the author’s view, this transaction may be considered as an actionable claim on which both service tax / VAT was not applicable. Keeping that ideology of actionable claim under consideration, GST will also not apply as a definition of supply [Clause 6 Schedule III read with Section 7] under tests Act excludes actionable claim. Another view is that; this transaction may be an outright sale. When there is outright sale the service tax/ GST applicability will depend on the nature of the underlying asset sold and is to be paid by the borrower. e.g. IVY Bank sells one of its NPA as a going concern to Company ABC then the instant transaction is taxable undress and the same is classified as a supply of service, accordingly the rate of tax payable is NIL in terms of Entry 2 classified under Chapter 99as specified under Exemption NN 12/2017-CTR.

To summarize all the income sources of the banks, have to be thoroughly scrutinized specifically interest income from credit cards and thereafter the auditor has to comment on its taxability, compliance with tax payment along with interest, applicable penalty, and transparency in disclosure in the returns filed.