Impact of GST on Banking and Financial Institutions


The Indian banking industry is one of the largest in the entire world. The roll-out of the GST is expected to prove to be a challenge for the Banking sector on two counts – First, the higher rates of GST as compared to the existing rate of service tax and second, the vast geographical reach of most banks.

With the GST with just a couple of days in its roll-out, the banking sector needs to ensure that they are prepared for this new tax regime.


Under GST Law, there will be an obligation on all the banks having their branches in several States and Union Territories (UTs) to get registered in each such State and Union Territories (UT). At Present, banks pursue the Regional or Zonal structure where for a single big State, there may be multiple Zones and conversely, one Zone may consist of more than one State.

Accounts and Administration:

Under Goods and Service Tax regime, financial transactions between the same Bank’s branches will come under the purview of GST, which may result to be burdensome. The levy of GST on branch transactions could be onerous because of the huge number of transactions being carried out.

Account Linked Financial Services

The location of the recipient of the banking services will be the place of supply on the records of the provider of services. In the centralized and digitized system prevailing in India identifying the service recipient’s location will be quite complicated. In cases where the service recipients like traders, manufacturers, professionals and other workers frequently shift from one place to other just to search for better opportunities, the service provider may have the different address namely current address, permanent address, KYC address and address of communication.

 Non-Account Linked Financial Services

In the case of non-account linked services, the place of supply would be the location of service provider.   Again this will hit such banking companies which are prevalent in a remote location to set up their presence but transact and operate from the back office located in some other state.

Actionable Claims

Actionable claims come under the exclusion part of the Service Tax as it does not constitute as a service, as a result, no tax is levied under the current regime. However, under GST actionable claims will fall under the definition of supply of goods. From discounting of bills to securitization will now be liable to tax affecting B2C and B2B majorly.

Difficulties to Banking Industry:

Now banks and financial institutions will be required to register for their all office location. Banks and Financial Institution will be required to maintain separate books of account to manage all input, utilized and unutilized credit.

Due to registration procedure of all locations of banks and financial institutions may create a lot of trouble as they could just see the difficulty in paying increased taxes under the GST. Also, the reverse charge and the partial reverse charge compliances would add to further compliance costs.

Benefits to Banking industry:

Now the Banks and Financial Institutions will be able to set-off their output GST liabilities against input tax credit received on purchase of goods. Under the current CENVAT mechanism, banks and financial institutions are entitled to take partial credit for service tax and excise paid on the purchase of qualifying goods and availing services which are used in the provision of providing output service.

Banks are not allowed to avail input tax credit of State VAT paid on the procurement of any goods by them. As most of the indirect taxes will be subsumed by GST, banks will be eligible to take the credit of GST paid on goods procured as well.

There is no Input tax credit allowed under the existing CENVAT rules. However, under GST regime banks will be allowed to avail the input tax credit for making outward supply and this will also help to reduce tax evasion.

Under GST doing business will be simple and easier. The rapid growth in business will lead to the additional demand for funds. Spontaneously, this will increase the number of transactions in the bank and financial institutions as the business and current scenarios ask to go for a digital transaction.

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