The revolutionary goods and services tax was introduced in July 2017 to boost the economic growth of the country. Since its implementation, almost every sector of the nation has witnessed both positive and negative impacts.
Every sector of the nation is trying to understand and get along with the new norms of the GST law. However, it is challenging for banks and NBFCs to radically adopt these new changes as they provide numerous services like loans, lease transactions, hire purchase, and other fund and non-fund operations.
The whole process of taxation needs to be done on the gst portal online, which is not convenient for everyone. Given below are some of the most significant impacts that GST has on the banking sector.
Added Credit On Procured Goods
Before the implementation of GST in the country, the banks were not allowed to claim any state VAT(value-added tax) on procured goods. They were only able to receive a partial credit of CENVAT. ( Central Value-Added Tax)
Since GST has replaced all the indirect taxes with a single tax, banks are now able to avail credit for GST on procured goods as well. This is one of the crucial reliefs for companies that are primarily manufacturing goods rather than providing services.
Separate Compliance Registration For Each Branch
Before the introduction of the new goods and service tax (GST), all the branches of the bank had a single centralized service tax compliance registration.
But the new GST law has made it mandatory for each branch of the bank to have a separate compliance registration. It does create problems for banks as compliance registration is a very time consuming and complicated process.
Apart from separate registration, the burden of filing return also increases substantially -in terms of the number of return formats and level of details required in these returns. Banks need to stay updated with every single gst notification to avoid any penalties.
The Hassle of Input Tax Credit
Before the implementation of new GST law, every bank and NBFCs were allowed to take a 50% reversal of the central value-added tax ( CENVAT) credit that was obtained from inputs and input services. There were no prior conditions to reverse the credit for CENVAT on capital goods.
But now, the terms of the reversal have been modified and for capital goods, inputs and input services, only 50% of availed CENVAT credit is reversed.
This drastic change made a significant impact on the banks as now they are left with an increased cost of capital with 50% reduced credit on capital goods. There is another side to this factor that can be seen as a benefit to banks, as this new unified tax regime reduces the production costs, which helps in increasing profitability
More Secure Transactions
GST has helped in a lot of ways to reduce the formation of the parallel economy, which has been a significant threat to banks and other financial bodies of the countries.
The goods and service tax curbs tax evasion that will allow banks to reap the benefits in the future with increased demand for funds and more accounted transactions.
Change In Assessment and Adjudication
Before the implementation of GST, banks and NBFCs had to resort to one state regularity authority for the evaluation of total service tax.
But now, every branch of the bank has to justify its position on taxation charges in the respective state and provide relevant reasons for usage of input credit tax in different states.
It creates a significant issue for banks and NBFCs as there is more than one adjudication authority involved under new GST laws. It leads to slow down the adjudication process as there can be disputes among different opinions on one issue.
Impact Of GST On Transactions
There is no change in the loans offered by banks and NFBCs as they are money to money transactions, so no GST is charged on the loan or the loan interest.
Hire purchase is a process when the asset buyer pays regular instalments and takes complete authority of the asset from the starting of the agreement. In this case, both the leasing charges and the cost apply to GST.
These are some of the significant impacts of GST on the banking sector. However, the ultimate result of implementing GST to various sectors of the country can be seen in the long run when this law attains some maturity in the coming years.