Banks Should Prop Up IT To Avoid GST Challenges

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Over a period of time, with evolving consumerism, Banks have introduced multiple lines of business under a variety of charges. Today, on an average, a commercial bank, public or private, offers anywhere between 15 to 30 products and services to its customers such as Savings, Checking, Term Deposits, Retail Loans, Commercial Loans, Trade Finance, Remittances, Payments, Cash Management services, Credit Cards, and Prepaid cards to Forex, etc.  Under these products, banks provide a host of “Services” as well.  And a private sector bank which provides the above products can have about 2450 chargeable services to offer to their customers. And all these products and services attract service charge. Apart from these identified services, banks also offer a host of “Over the Counter” services that also attract service charge. 

In India, the total quantum of transactions processed daily amounts up to 100 million and are steadily growing, with about 50% of it being processed by the top 5 banks. Of these transactions, about 30% can be safely assumed to have a service charge impact, which makes it essentially 30 mn transactions per day. Besides 30 mn daily transactions, there are periodic charges that banks levy on their customers.  The key point here is that transaction volumes added with GST related changes, bring out a new dimension to banks and its consumers.

Currently, i.e., the pre-GST era, charging a customer is straight forward. Whenever a customer avails a service, the service charge is levied. Service charge attracts a Service tax of 14.5% plus Cess charges. Today the Customer gets debited for his Service Charge, plus Service Tax and Cess only.  These transactions, as of today, do not have a large implication as neither the customer nor the bank needs to think through the source and destination of supply, origin of accounts, point of debit, cash management services, exemptions etc., 

However, in the GST regime, the following will become manadatory: -

1.       Customer needs to understand the impact of getting service tax billed to his account.  Due to this, the customer might end up creating multiple accounts across states to get complete benefit of Input and Output taxes at the state level.

2.       Bank needs to document minute details of every service which is chargeable.  Every charge transaction needs to have track of:

a.       Source of supply

b.      Destination

c.       Inter State vs Intra state

d.      GSTN of the customers for respective states

e.      Invoices against the customer for each transaction

f.        Exemptions, is any, against each service charge or the customer

g.       & many more

3.       Banks might want to set up branches across the country based on their customer base, as they would need this to reap benefits of input and output taxes across states accordingly.

4.       All centralized service charges viz charges for services like Letter of Credits, Bank guarantees, Loan processing, Syndications etc., will need a strategic shift or additional accounting impact identified and addressed.

5.       Banks would need to work on the strategy on the following:

a.       How are they going to get invoiced by their vendors?

b.      How are they going to share revenue with partner organizations and banks in instances of common service charges?

c.       How are they going to distribute service tax incurred on account of each state?

d.      In the absence of clarity on International security deposits, would there be double tax for revenue share and service tax share

e.      Would it make sense to bill the customer by each state and reduce the complexity

In all these, technology will play a major role as banks must run a hassle free show and ensure each line of business work in a seamless manner. The implementation will be challenging since this would need banks to align their systems in accordance to the requirement. They would need restructuring of processes, accounting, the various control mechanisms involved in the IT systems, to be able to maintain financial records with ease.

With banks here offering a number of services to their customers via multiple line of businesses, the service offerings can reach up to 200 for a large commercial bank which means that a service charge and service tax would be levied in each of these services. Once GST is implemented such complexities associated with handling different lines of business will recede.

It is imperative for banks to start early and equip itself both on tax and IT front to avoid incremental challenges, since depending on the nature of services, B2C and B2B operations, the approach will also vary. There is a pressing need for a robust IT system to serve the predetermined purpose of following the compliances. Carrying out a complete process of automation from customer management to tax and integration of tax information will hold the key for banks to efficiently operate under a unified tax regime and provide uninterrupted service to its customers.

Banks and Financial Institutions hand have had minimal impact in Indirect taxes [though they were adopting service tax]; but now with GST roll out, a whole host of challenges crop up.

Every bank in India, be it a larger Public sector or a private sector bank or a small Foreign bank with limited operations in India, are engaged with some of leading tax consultants to assess the impact of GST on their business. The complexity is many fold when banks have different business entities like corporate banking and investment services, insurance, Securities, and asset management to name a few. The challenges are not purely technology resolvable, challenges include strategic direction, incurring of additional costs, cost of compliance, changes to existing technology landscape, fleet on street training, front office training, call centre and self-service channel impacts etc.,

 

Banks, since a very long time has been considered as a huge support to the Indian economy.  While with GST implementation there will be challenges, in hind sight it would only be fitting for financial institutions to initiate action steps and bring in the required change, be it at the operational level, the tax treatment or product mix, to be able to adeptly embrace this change.