What is the manner of dealing with various services provided by banks and other financial institutions?
Banks and financial institutions provide a bouquet of financial services relating to lending or borrowing of money or investments in money and other related services. For such services invariably a variety of instruments are used in the financial markets.
Transactions in such instruments have to be examined on the touchstone of definition of ‘supply’ given in Section 7(1) of the CGST Act, 2017 to see whether such transactions would be chargeable to GST. Broadly, the following legal provisions would have a bearing on determining the taxability
of such transactions.
The definition of ‘goods’ and ‘services’ in Section 2(52) and Section 2(102) of the CGST Act, 2017 specifically excludes money and securities respectively.
‘Money’ has been defined in Section 2(75) of the CGST Act, 2017 to include instruments like cheques, drafts, pay orders, promissory notes, letters of credit, etc.
Therefore, activities that are only transactions in such instruments would be outside the definition of service. This would include transactions in Commercial Paper (‘CP’) and Certificate of Deposit (‘CD’) (as they are in the nature of promissory notes), issuance of drafts or letters of credit, etc.
While these transactions would be outside the ambit of supply, the related activity, for which a separate consideration is charged, would be chargeable to GST if other elements of taxability are present. Therefore, GST would be levied on service charges normally charged for various transactions in money including charges for making drafts, issuance charges for letter of credit etc.
Definition of ‘securities’ includes ‘derivatives’. Transactions in instruments like interest rate swaps, and foreign exchange swaps would be excluded from the definition of ‘supply’ since such instruments are derivatives, being securities, based on contracts of difference.
However, any attendant service charges or fees would be chargeable to GST.
Further, services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount is exempt from the levy of GST.