By CA Altamush Zafar
The first financial year under the GST regime is coming to an end but there is no dearth of confusions in the provisions of the law. This series will focus on various issues that are still unanswered. This is the first part and we will talk about the following issue:
Input Tax Credit (ITC)
First a brief explanation about what is Input Tax Credit. Input Tax Credit is the tax paid on your purchases which can be availed and utilized to pay taxes on your sales. In this way the person pays taxes only on the value added in his product or service. In Indian GST Law the tax structure is a dual model. For Intra State (within a state) Transactions Central GST (CGST) and Respective State GST (SGST) will be levied and for Inter State (between two states) Transactions Integrated GST (IGST) will be levied. The levy of CGST & SGST or IGST will be depend upon the location of supplier and the PLACE OF SUPPLY. To determine the place of supply there are comprehensive provisions in the Act. Like for example and relevant for the current issue, the place of supply of services related to immovable property like construction service, architect consultancy, lodging and stay, renting etc. will be the location of property itself.
Now consider a situation where an owner of a firm registered under GST in the State of Uttar-Pradesh travels to Mumbai (Maharashtra) for his business purposes. He stays in a hotel in Mumbai during his business trip. The hotel will charge him CGST and Maharashtra GST. Now the question arises whether the person will be eligible to take credits of this service even if he provides the GSTIN of his firm.
The opinions of Consultants are divided on this matter. One category are of the opinion that no credits shall be available on this transactions and to avail the credits the person will have to get registered in Maharashtra. This issue might not hit hard on businesses in general as number of transactions might be less but it will certainly be a problem for people who are engaged in related business like travel agents booking hotels on behalf of customers. A Writ Petition (W. P. (C) 7320/2017) has also been submitted to Delhi High Court citing this issue in the case of D. Pauls Travel & Tours Ltd. Versus Union of India & Another however the final decision is yet to come.
The Honorable Court suggested that this issue must be taken by the GST Council and suitable clarifications should be issued. Clarification on this issue is still pending.
Input Tax Credit Issue in Financial Sector
Continuing our series “Confusions in GST Law”, this time we will be discussing Input Tax Credit Issue in Financial Sector. A brief description of what is input tax credit – Input Tax Credit is the tax paid on purchases of goods and services and which can be utilized for payment of tax on the sale of goods or services.
ITC in Institutions and Companies which Grant and Accept Loans and Deposits
Accepting and Granting Loans is a service for which consideration is in the form of Interest. This Interest is exempt from GST and specifically comes under Nil Rated Supplies. However, all other charges which Banks and other such Institutions charge are taxable under GST. Therefore, these Institutions provide both taxable and exempt supplies simultaneously.
There is a provision in GST law that where a taxpayer supplies both taxable and exempt supplies then such taxpayer will have to reverse its Input credits on purchases which are commonly made for both exempt and taxable outward supplies. The method of reversal is given in rules and it provides that the reversal shall be done in the proportion of Exempted Turnover to Total Turnover for that month. This method requires classification of outward supplies and classification of purchases whether they are used for taxable outward supplies or they are used for Exempt Outward Supplies or they are for common supplies. As Financial Institutions like banks have a lot of transaction on per day basis and business being spread out throughout the Nation it may become cumbersome for such financial institutions to calculate reversal by this method. This method is also not cost-effective because it requires immense efforts to calculate the exact amount and the corresponding benefit might not be that fruitful.
Considering the above situation, the Act has allowed such financial institutions including NBFC’s to take 50% of all eligible input credits [not blocked by section 17(5)] and the rest shall lapse. The Act provides that 50% credits shall be taken for all inputs, capital goods, and input services. It is also stated that once this option is exercised then this method will be carried on for the whole financial year.
Now consider a situation where the financial institution has exercised the option of availing 50% of Input Tax Credit and apart from lending and accepting deposits it also engages in other taxable business. The question arises whether input taxes on inputs directly related to the other taxable business shall be available on full or they also have to be reversed by 50% along with other inputs.
Many Financial Institutions provide other services along with lending money like insurance, portfolio management, trading in gold coins, bullion etc. Now take trading in gold. Trading in gold is a taxable business. Whatever you buy, you sell that quantity. Now the bank (assuming it has availed the option of 50% credits) will sell gold with 3% tax but while buying the same will take credits of whole 3% or 1.5%? This is just one example; Public Sector Financial Institutions carry on many businesses which are totally unrelated to finance. They will also face similar problems. Possible solutions may be either not to take the option but that will increase workload immensely OR separate registration as different business vertical but then imagine different verticals for each business and each state will result in number of registration for the same bank and this will increase the compliance workload.