Published Editorial

Long road for financial services to GST readiness

August 2016

  • Share

Moneycontrol

By

Divyesh Lapsiwala
Tax Partner, EY India

The draft model GST law is in public domain since June 2016. Central Government’s approach to solicit feedback on same from all quadrants of the industry exudes its confidence in making GST a reality in early part of fiscal 2017-18 though the timelines are ambitious. The implementation, of course, hinges on the constitution amendment, which got the impetus by the upper house clearing the bill in the ongoing monsoon session. The government also remains confident of closure of the balance amendment process over short run and that makes GST a serious business to deal with, more than ever before.

While the effect of GST on varied sectors is driven by the operational models each one follows, at a broad level, there are efficiencies in times to come. Although this, the GST narrative for financial services looks not just unique but also challenging. This emanates from the fact that this industry encompasses economic services to particularly hold, advance & manage money and related personal/ commercial risks and is a highly regulated sector.

Under service tax, the financial services sector enjoys certain significant exemptions (like interest) and compliance exceptions (like invoicing). The same is witnessed in the treatment of banking and financial services under various other VAT regimes internationally. While the model law adopts various existing concepts from to be subsumed tax regimes, in the current form, it is not fully addressing the question of whether the outcomes would be similar or materially different in the new regime.

The principal issue being presently only fee based income falls within the tax net and the income from fund based activities like interest, discount, etc are largely excluded. The draft GST law, however, does not carve out such exception in any form thus exposing all financial services (fee based or fund based) to tax. A similar situation also ascends due to recognition of securities as ‘goods’ and actionable claims as ‘services’ though without hinting exclusion of sale/ purchase thereof from the ambit of GST. I expect that exemptions to interest, securities and other fund based transactions should be announced in the next round of documents shared by the government, but the point is that these are significant, and therefore their possible eventual absence could majorly impact the sector.

It is noted that a few issues also stand resolved with advent of GST like the existing double taxation of leasing transactions under VAT/ service tax laws, at parallel. Likewise, merger of numerous taxes and avoidance of cascading not only would lower costs but also widen the input tax credit base. Non-prescription of the 50% rule for claiming credits however, could impact the sector. As of now, the sector does not face any challenge of determining “what is my exempt turnover”. This question is very hard to answer given that interest is earned (which likely to be exempt) but that is funded by money on which interest is paid, or there are treasury operations, or foreign exchange dealings, or derivative products, or proprietary investments. Measuring the “exempt” value of these transactions would be extremely challenging (if not impossible). Any adhoc rule to measure the exempt value has the potential of being arbitrary (and therefore not aligned to reality of each player in the sector). Therefore, a similar rule (like 50% credit) is, in my view, a must!

Further, in some cases the tax today is collected/ payable on a presumptive and not median rate basis. Forex buying/ selling, bundled insurance cum investment product, etc are examples. I expect a similar regime to continue in GST.

Moving on, GST requires every transaction to belong to a particular state such that a portion of taxes on same could flow to the state so identified. This will be determined basis the place of supply norms. The norms deal with insurance services, account linked & non-account linked services, stock broking services in particular and everything else in general. In this regard (1) the scope of the term ‘account’ and phrase ‘account linked services’ is not known; (2) place of non-account linked services is tagged to location of supplier of service. This could illustratively result in an additional tax burden on service provided to customers outside India as they would typically not have an account with the bank/ institution in India. The same is contrary to how other economies of the world operate in similar cases and hence, makes India less competitive, etc.

Also, no exception on issuance of invoices has been allowed to sector implying bundles of invoices will have to be printed and sent to customer in GST regime, while the purpose today is served merely by the periodic statement.

Separately, centralized compliance for pan-India operations is characteristic of the sector although GST warrants a breakdown at the State level. This impacts two aspects, firstly triggering the need to establish robust infrastructure and resources that could attend compliances in each state; and secondly, discouraging penetration of players in new states unless a significant market opportunity exists since the cost of compliance could far outweigh the low profitability models when implemented at small scale. In my view, the sector has a strong case to pitch for centralized registration for GST purposes.

A connected aspect that emanates from the discussion above is that the dynamics of the law when interposed on the scale of financial services sector would further pose a two-fold challenge of (a) not being able to handle compliances manually and (b) certainly not being able to do it on real time basis unless supported by seamless technology.

Thus, an overall strategy for GST transition would also warrant investment in quality technology assets that captures business in a way more superior than current, processes it with multiple conditions that are surfacing courtesy the GST law and throw an output that could match the GSTN templates! Though the said investment decision would vary depending upon size and offerings of business in each group or entity. Hence, the qualitative aspects of the said technology decision should be consulted with all stake holders in business and compliance.

It is thus a long road that the financial services sector has to cover over a short time frame coping with both unique propositions as well as uncertainties.