Along with sweeping changes in federal and state taxation, the goods and services tax (GST) introduced in 2017 also impacted how business was done, particularly in the financial services sector. With the intent of ensuring “smooth roll-out” of GST, the GST Council constituted 18 sectoral working groups to consider issues and problems relating to 18 sectors in June last year. The objectives of these groups included interacting with and examining representations from trade and industry bodies, highlighting specific issues on the application of GST, and providing sector-specific guidance. On 3 June, the Central Board of Indirect Taxes and Customs (CBIC) issued a compilation of 91 “frequently asked questions” (FAQs) on the application of GST to the financial services sector.
The FAQs provide guidance on free services provided by banks, assignment of debt, stockbroking, mutual funds, etc., as well as on procedural matters such as filing claims, deferring credit and providing services to non-residents. While the headlines on free services by banks not being subject to GST have captured the most attention, relatively staid matters that affect the way financial institutions do business with each other have slipped under the radar. Key instances of such clarifications include the non-applicability of GST on the assignment of secured and unsecured debt; transactions under bank borrowing arrangements called collateralized borrowing and lending obligations; repo and reserve repo transactions; derivatives, futures contracts without a delivery option, and forward contracts with a net settlement feature; commercial paper, demand promissory notes, and certificates of deposit; invoice discounting facilities provided by banks; and interest on debt instruments.
Responses to queries on the above generally mention that if any service charges, service fees, documentation fees, or similar charges are payable, GST would be applicable on such amounts. This is a fair position and has not been perceived as controversial.
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