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Banking on GST

Banks and financial institutions have encountered several issues while implementing GST. However, they are equipped to overcome these

While the introduction of Goods and Services Tax (GST) is considered as a major forward-looking step in the tax administration in India, the contention is that the service sector in the country would face major handicaps than the manufacturing or trading sector. Banks and financial services institutions belong to the formed category. Because of the varied nature of their operations, especially their pan-India ambit, compliance of GST is a major challenge for them. Some of the major factors that inhibit their adoption of the regime are the number of branches spread across states, which makes registration process a hurdle, input tax credit procedures, issues relating to assessment and adjudication as assessments would be done by the respective state regulators under which the respective branch is registered and the prevalence of more than one adjudicating authority, which may have different opinions on one single topic. As such, the sector faced several issues in terms of customer profiles, services matrix, IT systems and operation to capture the data at both front and back end.


How do banks and financial services institutions view challenges and complexities that they face in the wake of GST implementation?

“Introduction of GST called for procedural as well as system level changes, which are to be implemented to ensure proper compliance of various provisions under GST Act,” says Ashotosh Khajuria, ED and CFO at the Federal Bank. He considers the following as the major challenges:

  • As banks have place of business in almost all states/UTs, they need to have separate registration in each state/UT.
  • There should be prepared with IT systems to comply with the data requirement for filing of GST returns, retrieval of transaction level data needs to be ensured.
  • There is need to ensure full compliance with respect to filing of returns in time – provisional as well as final output and input returns on a monthly basis, updating of additional details of customers to ensure proper computation of tax liability and tax credit.
  • They will have to handle increased number of returns – state-wise, monthly/annual and transaction-wise (output/input) returns.
  • They have to handle amendments in returns, credit/debit notes for earlier transactions, matching of input credit details uploaded by suppliers with available credit as per the books etc, which are ongoing additional tasks.
  • They would need additional workforce for filing, verifying data accuracy, reconciliation of input credits.
  • They have to generate and communicate GST invoices to customers, undertake updation/modification of incorrect input data at transaction entry level at branches and also counter lack of awareness among customers.


“Federal Bank is ensuring effective implementation and proper compliances of relevant provisions of GST laws and regulations. An effective team has been constituted to ensure timely handling of all the challenges related to implementation and smooth adaptation of the changed tax environment. Further, system level changes are being implemented to meet the expected high level of GST compliance,” says he.


Ashutosh Khajuria

Banking professionals in general feel GST being a major tax reform in the country, some initial complexities in the implementation are inevitable and these are bound to get settled over the period. “The major challenge is the understanding at ground level, which need continuous communication and engagement,” one of them avers.

Like banks, other financial institutions like NBFCs, brokerages and AMCs too are facing the challenges of implementation of the regime.

Says Trivikram Kamath, executive vice president & head – Operations, Finance & Technology at Kotak Securities: “As a securities broker, we need to issue contract notes on a daily basis and the contract notes need to have a break-up of the GST between central and state administrations at the time of generating the contract notes. Also, the state level inputs can be claimed only against the state level output.”

He says his company is now levying GST on delayed payments, which is largely interest in nature and it has also made necessary software changes / sourced external software to assist it in this.

Kamath also says there is need to plan procurement carefully and also movement of assets across states.


Kalpesh J. Mehta, partner, Deloitte India, who recently authored a Deloitte-CII report on ‘Paradigm Shift in Banking – Future Strategies’, which discusses GST and its impact on financial services, says multiplicity of compliances, partial-readiness of the IT infrastructure and virtual division of an organization into many state-wise organizations has vexed the financial services sector. “Being used to a centralized functioning and compliance system, banks and financial services institutions have had to grapple with state wide decentralized compliances and credits. Each bank has individually taken up the challenge depending on their product portfolio and risk appetite and majority of them are now equipped to face the challenge,” says he.

While these institutions admit that compliance requirements have increased but with upgradation of IT applications they have been able to address the issue.

Khajuria maintains that though Federal Bank has taken separate registrations in each state, data capturing and filing of GST returns are centralized. “In order to ensure effectiveness and to minimize errors, all GST related works are centralized and being undertaken at the head office, says he.

Kamath too states Kotak Securities has registered in each state and has made necessary changes in systems and processes to comply with the same.

Mehta of Deloitte says the need for separate registration has resulted in implications much larger than what meets the eye. “It has not only resulted in substantial increase in compliance costs, but has also called for revamping of the mechanism in which the banks and the NBFCs have operated. The need to revisit the operational processes is surely a major issue for the industry players,” he points out.


He adds that identifying the right place of supply is of paramount importance for every registered person as it helps determining the type of tax payable. “As against the general perception, the place of supply provision for the banking and financial services is relatively simpler. In compliances with the RBI guidelines, the banks as well as the financial institutions are required to undertake the KYC for their customers. Thus, for most of the banking products, there would always be an address of record with the banks, which makes it easier for them to identify the place of supply. The bigger hurdle would be attributing the liability to a state,” says he.

In most cases, bankers feel it is a one-time exercise. According to Khajuria, the bank is following the logic of customer communication address (state) updated in the bank’s record as place of supply. LOS is taken as address (state) of service providing branch.

Kamath also says Kotak Securities largely go by the address provided in the KYC.


Do they think the fact that there will be different adjudicating authorities with each authority holding different opinion on the same underlying issue, will create roadblocks in the adjudication process?

While the sector as a whole feels the government will come up with guidelines for assessment, it may take time.

Says Khajuria: “Lack of clarity or the possibility of interpreting the same provision in different ways will result in different opinions on the same underlying issue. There will be complications and uncertainties resulting from these as the view taken by different adjudicating authorities may differ. However, as we are at the early stage of implementation of GST, we need to wait for commenting on this aspect. We expect that there will be only one authority controlling one entity at the operational level.”

According to Mehta, this factor cannot be ruled out, at least in the initial years. “This is irrespective of whether the adjudicating authority is the center or the state. With the learning curve kicking-in and proper and training from time-to-time, such difference of opinions can be minimized over a period of time,” says he.

Kamath too admits there are apprehensions, but he says the implementation is still in its initial stages and time will take care of these apprehensions.


Kalpesh Mehta

Practically all fee-based services have come within the ambit of GST. Obviously, this increased the load on banks and financial services institutions. But bankers feel this additional work can be streamlined and handled through automation.

Mehta, however, believes the pool of services which were taxed in the erstwhile service tax regime remains the same under the GST regime, with almost no addition therein. “However, given the same set of fee-based income, the hassles have multiplied owing to the requirement to attribute the liability at a state-wise level. In order to streamline the work processes, it may be prudent to have an SOP in place to attribute the liability at the right place and identify the right place of supply. Also, establishing appropriate tax logics in the IT systems would prove fruitful in the long-run, provided the IT systems are flexible enough to absorb the amendments in the law with minimal time,” he explains.

Khajuria points out that the term ‘supply’ has practically brought almost all fee-based services within the ambit of GST and collating the required data for proper compliance of GST law, viz transaction-wise details at a granular level, charges collected, GST on transaction (whether SGST, CGST or IGST), invoice numbers, customer State, GSTIN of the customer etc., is a major challenge. “We have centralized all GST related work. An effective GST team has been constituted of well trained and highly skilled members to handle all the challenges that exist and/or could arise in future. Segregation of responsibilities and duties has been properly undertaken and is closely supervised. Personnel at IT department are properly trained and are extending proper assistance for GST related data capturing and filing of output return. We have also engaged a leading consulting firms as our GST implementation partner. This firm has deputed a full time GST expert for our assistance,” says he.

For Kotak Securities, all fee-based incomes were already under the purview of service tax  and as such it is the same. “We only have to make sure of breaking it up state wise,” says he.


While the general view among bankers and financial services professionals is that the complexities in the system would not impact a firm’s relations with customers, Khajuria believes increase in GST compliances has resulted in customer dissatisfaction to a certain extent. “We are facing customer complaints mainly with respect to refund of GST collected. To maintain the customer relationship, it is a normal practice in the banking industry to offer waiver/concession in applicable charges. As there are stringent norms on refund of GST collected, we are extra careful while considering the GST refund requests from the customers,” he says.

Kamath maintains that there is a reasonable awareness on GST and customers would largely understand that this levy is a pass through.

Mehta is of the view that non-readiness of the IT system and significant instability in the law may have a bearing on the customer relations. Says he: “This would be more so, in case of B2B financial services, wherein the customer is desirous of availing the input tax credit but is denied due to a default by the bank. This too could be narrowed down over a period of time once the law settles.”


Mehta adds banks and the financial institutions have been historically operating under a centralized mechanism wherein an entire bank, even when present in 20 states was just one organization, engaged in seamless provisioning of financial services. Decentralization of the operations and consequent changes in the process has posed a great challenge for the banks and the financial institutions and the unprecedented need for revamping substantial operations, business processes and the systems has not been well received by the financial services sector owing to the complexity and the huge costs involved, he says.

Khajuria reveals that at the initial time of onboarding GST, the bank has faced issues on obtaining provisional user ID and password.  However, over a period, it has resolved the issues with continuous follow-up with the concerned departments/officials. “As the transaction level basic details are captured in core banking system, pulling of further details for GST return filing in the prescribed format is facilitated through ASP. I believe with the introduction of this regime, system level changes are warranted which we have ensured in a timely manner.  Further, GST input return is yet to be filed (filing of the same has been suspended till March 2018) which is one of the major concerns for us. Reconciliation of input credit is a time-consuming task, which needs to be addressed effectively,” he says.

Kamath explains it is simple terms: “It is complex. We embarked on the journey quite a few months before 1 July 2017. We are still fine tuning the systems.”


Is it likely that financial services would become costlier in the light of GST?

Trivikram Kamath

Mehta does not think so. “While there is an increase in the tax rate to the extent of 3%, the banks and the financial institutions are also eligible to claim the input tax credits on the goods and capital goods, which was a cost to them in the earlier regime. With increase in input tax credits, the banks and the financial institutions ought to pass on the benefits of incremental input tax credit to the customers.”

However, Khajuria feels banking services will be costlier as the rate of GST is 18% vis a vis the erstwhile service tax at 15% and GST will be applicable on all banking services except certain exempted categories. “Even though input credit can be availed on GST paid by B2B categories, B2C categories will have additional burden. Also, the liability under reverse charge on the supplies received from unregistered dealers/service providers will add to our operating cost, since this is a new levy which was not there in the earlier service tax regime and banks are allowed to utilize only 50% of the input credit,” he explains.

Kamath is also of the opinion that costs may go up marginally. He says banks and NBFCs are allowed only 50% input credit. As against 15% service tax earlier now at 18%, the input credit disallowance would be marginally higher.


Banks and financial institutions have to undertake technology refinements in creating an infrastructure for GST. For example, various workflows were built to capture necessary data in the current system.  Changes had to made in several systems, new software and additional hardware had to be brought in, in addition to creating monitoring teams.

Mehta says creation of a state-wise entity in the information systems infrastructure is the most important aspect, which will lead to each revenue as well as expenditure item being mapped to the state-wise entity.

In Federal Bank, Khajuria says system level modifications were done by the CBS provider to enable the bank to capture and compute the tax liability correctly and to collect and collate the required data. “To extract the required data from the CBS, we have integrated CBS with derivation module provided by an ASP.  Further, for filing the GST return, connectivity with GSTN portal had to be done, which is ensured by GST Suvidha Provider,” he says.


How optimistic are they that the problems get sorted out in the long run and it would be a major gain as claimed by the government?


Khajuria says while the bank had faced number of issues, it is confident all the initial implementation issues and concerns encountered in the transition period will be sorted out and it would stand to gain. He expects the following advantages:

  • Input Credit available for set off will be substantially higher compared to the service tax era
  • Bank’s customers’ credentials can be better checked with GST returns
  • Transparent record for tax liability and input credit and settlement of dues
  • One-to-one tracking of transactions ensures better compliance of government regulations

Mehta puts it in perspective: “Once the dust settles, the initial pain points would gradually fade away and the banks and the financial institutions may finally be able to reap the benefits of GST. GST is undoubtedly expected to give a boost to the Indian economy in the long run as it would make Indian markets competitive at a global level. With the growth of the national economy, the growth of the financial services sector is inevitable. Also, the government has shown a welcoming attitude towards rationalization measures recommended by the industry associations, which could further make life simpler for the industry at large.”

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