GST exemption on banking and financial services

As per notification number 12/2017, Services by the Reserve Bank of India is exempt from GST. Services provided to the reserve bank of india is not covered under entry 26 of the notification 12/2017. If services provided to RBI falls under some other entry head of the notification, then it will be exempted otherwise it’s taxable. Even services provided by banks to RBI would be taxable as these are not covered under any exemption. This notification also allows following banking and financial services to be exempt from GST.

In our last articles, we have discussed GST exemption applicable to education services, agricultural related services, charitable and religious activities. In this post, we will be discussing GST exemption on banking and financial services.

GST exemption for services by way of deposit, loan or advances 

As per entry number 27 of the notification 12/2017, exemption from GST is allowed to services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services).

The term interest has been defined in the notification 12/2017. As per this notification, interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.

As per this entry in exemption notification 12/2017, following charged by a bank or financial institutions are not exempted as its collected over and above interest on loan, advance or a deposit;

  • Service charges or fee
  • Documentation fees
  • Broking charges
  • Administrative charges
  • Entry charges
  • Any other fee which is collected over and above the interest amount charged on loan, advance, deposit.
  • Interest charged on outstanding credit card balances. It has been specifically excluded from the exemption in entry number 27 of the GST exemption notification.

Therefore, above charges are taxable under GST law. However, interest or delayed payment charges charged by a bank or financial institution to their clients for delay in payment of brokerage amount or settlement obligations or margin trading facility is exempt from GST as these facilities are transactions which are in the nature of extending loans or advances.

As per the notification here are two more cases where exemption from GST is allowed;

  • Services provided by allowing loan or overdraft facility or CC limit in consideration for payment of interest.
  • FDs or saving deposits or any other deposits in a bank or financial institution for which return is received by way of interest.

Entry number 27A inserted to allow GST exemption for services provided by a banking company to basic saving bank deposit account holders under pradhan mantri jan dhan yojana (PMJDY).

GST exemption on sale or purchase of foreign currency

As per entry number 27 of the exemption notification 12/2017, inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers is exempt from GST.

Authorised dealer of foreign exchange means, authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised U/s 10(1) of FEMA, 1999 to deal in foreign exchange or foreign securities.

This exemption on sale or purchase of foreign currency is available only when it’s between banks and authorised dealers of foreign exchange or between banks and such dealers. If sale or purchase of foregin currency services provided to the general public or any other person which is not a bank or authorised dealers of foreign exchange, then exemption from GST is not available.

Certain other services related to banking and financial sector have also been exempted through this notification number 12/2017. As per this notification exemption is available in following cases:

  • Services by an acquiring bank, to any person in relation to settlement of an amount up to two thousand rupees in a single transaction transacted through credit card, debit card, charge card or other payment card service.

Explanation.— For the purposes of this entry, “acquiring bank” means any banking company, financial institution including non-banking financial company or any other person, who makes the payment to any person who accepts such card.

  • Services by an intermediary of financial services located in a multi services SEZ with international financial service center (IFSC) status to a customer located outside India for international financial services in currencies other than Indian rupees (INR).

Explanation – for the purpose of this entry, the intermediary of financial services in IFSC is a person,-

  • Who is permitted or recognised as such by the government of india or any regulator appointed for regulation of IFSC; or
  • Who is treated as a person resident outside India under the Foreign Exchange Management (International Financial Services Centre) Regulations, 2015; or
  • Who is registered under the Insurance Regulatory Development Authority of India (International Financial Service Center) guidelines, 2015 as IFSC insurance office; or
  • Who is permitted as such by Securities and Exchange Board of India (SEBI) under the Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.