The introduction of GST in India impacted the (financial services sectors) Banking and Insurance sectors amongst other sectors in the country. Users were affected directly when GST was introduced as the prevailing service tax rate was 15%, and the new GST rate was 18%. In this article, we will discuss the impact of GST on the Banking and Insurance sectors:
Section 11 of the CGST Act 2017 grants the Central Government the power to exempt certain supplies (goods and services). As per Notification no. 12/2017 Central Tax (Rate) dated 28 June 2017, the following services are exempt:
- Extending deposits, loans, or advances when the consideration is represented by way of interest* or discount (other than interest involved in credit card services).
- Sale or purchase of foreign currency amongst banks or authorised foreign exchange dealers or amongst banks and such dealers.
*‘Interest’ means interest payable for any sums of money borrowed or debt incurred but does not include any service fee or any charge.
Note: It has been mentioned that interest on a credit card is excluded from the notification and is thus taxable.
The table below lists a few services which are exempt and taxable (for banking entities):
|Type of Service||Exempt /Taxable||Remarks, if any|
|Interest or discounts on loans/deposits/advances||Exempt||This includes interest on financial leases as well.|
|Documentation and Processing Fees for Loans||Taxable|
|Cheque or bill discounting||Exempt||Discounting is exempt as it is similar to extending a credit facility. However, any fees associated with the discounting is taxable.|
|DD charges, standing instructions charges, SMS facility charges||Taxable|
Like the banking sector, the central government has notified certain services of the insurance sector to be exempt in Notification no. 12/2017 Central Tax (Rate) dated 28 June 2017:
The following services are exempt:
- Services for life insurance, provided in the form of annuity under the National Pension System regulated by the Pension Fund Regulatory and Development Authority of India (23 of 2013).
- Services for life insurance, provided or agreed to be provided by the Army, Naval, and Air Force Group Insurance Funds to members of the Army, Navy and Air Force, respectively, under the Group Insurance Schemes of the Central Government.
- Services by the Employees’ State Insurance Corporation to persons governed under the Employees’ State Insurance Act, 1948 (34 of 1948)
- Services provided by the Insurance Regulatory and Development Authority of India (IRDA) to insurers under the Insurance Regulatory and Development Authority of India Act, 1999 (41 of 1999)
Services for life insurance, provided under the following schemes are also exempt:
- Janashree Bima Yojana;
- Aam Aadmi Bima Yojana;
- Life micro-insurance product as approved by the IRDA (having a maximum amount of cover of INR 50,000);
- Varishtha Pension Bima Yojana;
- Pradhan Mantri Jeevan Jyoti Bima Yojana;
- Pradhan Mantri Jan Dhan Yojana;
- Pradhan Mantri Vaya Vandan Yojana.
Rule 32(4) of the CGST Rules 2017, has defined the value of supply of services for the life insurance business. The cost of supply is calculated as follows:
- The gross premium charged from a policyholder reduced by the amount allocated for investment, or savings on behalf of the policyholder, if such an amount is intimated to the policyholder at the time of supply of service;
- In the case of single premium annuity policies other than the above:
- 10% of the single premium charged from the policyholder; or
- In all other cases, 25% of the premium charged from the policyholder in the first year and 12.5% of the premium charged from the policyholder in subsequent years.
However, it should be noted that when the policyholder’s entire premium is only towards the risk cover in life insurance, then the above two points are not applicable.
Services for general insurance, provided under following schemes are exempt:
- Hut Insurance Scheme;
- Cattle Insurance under Swarnajayanti Gram Swarozgar Yojana;
- Scheme for Insurance of Tribals;
- Janata Personal Accident Policy and Gramin Accident Policy;
- Group Personal Accident Policy for Self-Employed Women;
- Agricultural Pumpset and Failed Well Insurance;
- Premia collected on export credit insurance;
- Weather Based Crop Insurance Scheme or the Modified National Agricultural Insurance Scheme, approved by the Government of India and implemented by the Ministry of Agriculture;
- Jan Arogya Bima Policy;
- National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana);
- Pilot Scheme on Seed Crop Insurance;
- Central Sector Scheme on Cattle Insurance;
- Universal Health Insurance Scheme;
- Rashtriya Swasthya Bima Yojana;
- Coconut Palm Insurance Scheme;
- Pradhan Mantri Suraksha Bima Yojana;
- Niramaya Health Insurance Scheme implemented by the Trust constituted under the provisions of the National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation, and Multiple Disabilities Act, 1999 (44 of 1999)