[Opinion] Input Tax Credit Under GST | Implications on Financial Institution

CA Manish Raj Dhandharia – [2024] 160 taxmann.com 495 (Article)

GST is the most significant and biggest indirect tax reform witnessed by India ever since independence. It has widened the tax base and impacted multiple sectors including the service sector. The current GST regime provides for availment of ITC subject to certain conditions and restrictions, which inter alia may be sector specific also. Alongside GST, another major reform which has created a widespread impact on the mass is the digitization of banking sector, thereby making the banking services accessible to all, in a convenient manner. This has resulted in rise in the proportion of online transactions vis-à-vis cash transactions and growth of the number of users availing banking services.

Banking and financial services operate within a complex framework of regulations. Understanding the GST implications particularly with respect to ITC, for these entities is crucial. Accordingly, certain questions may arise in this regard – Which entity qualifies as a banking company or financial institution? What are the additional conditions required to be satisfied? What is the extent of claim of ITC available?

An attempt has been made to answer and deliberate upon these questions through this article.

1. Legal Framework: ITC for banking companies

1.1 The conditions for availment of ITC have been provided in Section 16(2) of the Central Goods and Services Tax Act, 2017 (“CGST Act”). Further, Section 17 of the CGST Act, lays down the provisions with respect to ‘apportionment of credit and blocked credits’.

1.2 The banking companies and financial institutions deal with a myriad of inputs, ranging from administrative expenses to technology investments. Further, several activities of banking companies, like extending loans and earning interest thereon is exempt from GST.

1.3 Accordingly, to ease out compliance requirements, Section 17(4) of the CGST Act, prescribes a few specific conditions which are only applicable to the suppliers of certain financial services. Section 17(4) provides as follows:

“A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of subsection (2), or avail of, every month, an amount equal to fifty per cent of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.”

1.4 Relevant extract of Section 17(2) of the CGST Act is reproduced hereunder:

“Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”

1.5 Hence, Section 17(4) supra provides a taxpayer with two options to avail credit.

(a) Firstly, the taxpayer has the option to avail proportionate credit as per the condition prescribed in Section 17(2) supra. This basically means that the taxpayer can avail proportionate ITC to the extent of taxable and zero-rated supplies in cases where it is involved in making both taxable (including zero-rated) and exempt supplies. Rule 42 and 43 of the CGST Rules must be complied with in case this option is chosen.

(b) Secondly and alternatively, the banking company or financial institution could directly claim input tax credit of 50% on the value of inputs, capital goods and input services availed in a particular month and the remaining shall lapse. As regards the procedure for claim, Rule 38 of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”) must be duly followed, if the taxpayer is eligible.

1.6 Based on the above reading, it may be said that the following conditions must be met in order to claim the benefit of availment of 50% of the ITC every month:

(a) The taxpayer availing ITC must be a banking company or a financial institution including a non-banking financial company, and

(b) The taxpayer must be engaged in supplying services by way of accepting deposits, extending loans or advances.

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