GST rollout: New indirect tax regime brings in a mixed bag of gifts for BFSI sector
GST on leasing harmonises input across all levels to make the end product cost effective to the consumer
The introduction of Goods and Service Tax (GST) is the largest reform, since opening up of the Indian economy. GST paves the way for the One Nation One Tax ideology. India having federal democratic structure had multiple States and Union Territories based indirect taxes with certain additional Central levies. This lead to multiplicity of taxes and a cascading effect which lead to Tax on Tax. This multiplicity has been a contributing factor to fillip inflation over a period of time. In order to curb such cascading effects, the amalgamation of taxes was eminent.
The impact of GST on the Indian Banking and Financial system is a mixed bag of pros and cons. There are many areas within the financial domain affected by the advent of GST. Considering leasing; despite being amongst the top 10 economy the Indian leasing volume is less than 3 percent of global volumes. We are ranked outside the top 50 nations while our BRICS (Brazil, Russia, India, China and South Africa) peer are all within top 20.
GST on leasing harmonises input across all levels to make the end product cost effective to the consumer. Higher rates under GST leads to requirement of higher working capital as at any point of time the input tax might not be fully absorbed against output tax liability. It also results in higher cash flow which consequently increases the credit risk on the underlying transaction. Both of the above factors result in increasing the cost of leasing an equipment. In order to sustain the nascent leasing Industry in infrastructure space, it is desirable that full input tax credit is allowed instead of providing a blanket restrictive clause.
The CGST statute exempts “Actionable Claims” from the levy of GST. NBFCs augment their funds by bilateral assignment of their receivables to banks or other financial institutions. Receivables Assignment secured by hypothecation or pledge of movable assets are not treated as actionable claims. Receivables assignments are defined under ‘supply’ category and are subject to levy of GST. For NBFCs, this will affect the fund procuring capacity. It would be beneficial if no tax on receivables assignment is maintained also under the GST regime.
In case of a defaulting borrower, the financier repossesses the assets (in case of asset backed financing). Sale of repossessed assets weren’t under levy of value added tax. In the sale of repossessed assets, NBFCs act merely as the sale facilitator for the borrower who have defaulted. Further, the input at the time of purchase would not have been utilised by the customer. So, in case of any levy of GST on sale of repossessed assets, no input tax credit shall be possible as the asset is owned by the defaulting borrower and the invoice of the asset is also with the borrower.
Under GST, companies need to register separately for each location in which they operate. For the BFSI sector due to the multiple operations in the fund and non-fund based services, fee-based services, hire purchase and lease based transactions, insurance services, etc. multiple registrations increases the operational inefficiencies. Additionally, extra requirements in terms of level of details, and periodicity of the returns filings has substantially increased.
The government has done a commendable job by putting in place the IT backbone towards integrating all these set-ups into the single GST Network. All data will be centralized with ready input-output norms and transactions will get tracked thereby minimizing chances of any tampering through mis-reporting (or under-reporting). Tracking of transactions will dissuade unaccounted cash transactions, thus acting as a strong deterrent for generation of black money. At this juncture, it is critical that the IT infrastructure remains robust enough to sustain the challenges raised by the administrative mechanism during the implementation of GST.
Overall, GST is a positive step for our nation, outweighing its few glitches. GST will bring in transparency and seamlessness of transactions. We are entering a new phase where we will witness new ways of doing business. Introduction of GST caused changes in businesses’ operations, IT, taxation and other areas. The success of GST depends on how well the transitions take place, within the government and with the tax payers. How the GST impacts at the micro-level is something we have to wait and watch. Meanwhile, we need to support this initiative and work towards making a newer and better India.
(The author is CEO, Srei Equipment Finance Ltd.)
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