Jan 31, 2018

Credit of GST on Interest Income

This article examines the compliance issue faced by taxpayers due to requirement of reversal on exempt service of extending loans, advances and deposits. For instance, Fixed deposits in banks. Unlike the erstwhile CENVAT Credit Rules which provided for an exclusion for such reversal for service of this nature, there is no exclusion from the requirement of reversal of such credit. The restriction of input tax credit results in increased compliance at the end of taxpayers, particularly in a situation where it is the only exempt service that a company may provide. The government may consider making suitable amendment to the law to exclude the credit attributable to this category of exempted service for the ease of doing business. The Press Release regarding the recommendations of the GST Council in its 25th meeting held at New Delhi on 18th January, 2018 also includes a recommendation to this effect. Let us keep our fingers crossed and hope that this recommendation would be given effect to.

Introduction
1. It is a usual practice for a company to extend loans, advances and deposits in the regular course of its business. In consideration of extending such facilities, it receives consideration in the form of interest.

This interest is received in varied scenarios. One category which is common for any business is the interest on fixed deposits made in banks. Further, interest is received on security deposits under statutory requirements. For example, Interest on security deposit made to Electricity department as required under electricity regulations.

There are also instances of interest on inter-company loans advanced by a company.

In the context of interest, Serial No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, inter alia, exempts "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)".

Owing to the above entry, the amount received by way of interest on the security deposit, interest on fixed deposit and inter-company loans constitute consideration towards an exempted service.

A natural consequence of the above supplies constituting exempted service is that the input tax credit attributable to the supply is not available as mandated under Section 17(2) of the CGST Act, 2017.

No exclusion for interest income under GST law
2. It is interesting to note here that there is no exclusion for interest income under GST law, as had been provided for under the erstwhile CENVAT Credit Rules, 2004. Explanation I(e) to Rule 6 under the erstwhile CENVAT Credit Rules, 2004 stated that the value for Rule 6(3) and 6(3A) shall not include the value of services by way of extending deposits, loans or advances, in so far as the consideration is represented by way of interest or discount.

In view of the specific exclusion, there was no requirement to reverse the credit attributable to the services by way of extending deposits, loans or advances where consideration was received in the form of interest or discount.

As seen above, there was a clear exclusion for the application of the reversal of credit under Rule 6 of the erstwhile CENVAT Credit Rules, 2004 on such exempted service. However, in the absence of a specific exclusion under GST law, there is a clear departure from the earlier provision in the present GST law.

Whether there has been a deliberate restriction?
3. The question is whether such a differentiation is deliberate, that is, whether there was indeed an intent to provide for such a restriction or not?

As the law exists at present, the input tax credit to the extent used for providing the above exempt supply is restricted.

Owing to the interest income qualifying as an exempted supply and there being no exclusion in the credit restriction, there would be many instances wherein credit would be restricted. Typically, there would be categories of credit which would be common to the business as a whole, including this exempted supply in question. Examples of such credit would be services as audit service and legal service. In all such cases, the input tax credit to the extent attributable to this exempted credit category is restricted. As the quantum of this supply may not be substantial, the reversal may not be significant.

The restriction of input tax credit results in increased compliance at the end of taxpayers of reversing the credit attributable to this exempt supply. These supplies are commonplace for any business and would exist in most of the businesses. There may be several instances where this is the only exempted supply made by a particular taxpayer. Complying with the requirement of reversal in such a case will result in significant compliance at the end of taxpayers. The government may consider making suitable amendment to the law to exclude the credit attributable to this category of exempted service for the ease of doing business.

Concluding Remarks
4. It is interesting to note a recent development on this front. The Press Release regarding the recommendations of the GST Council in its 25th meeting held in New Delhi on 18th January, 2018 includes a recommendation to provide in CGST rules that value of exempt supply under Section 17(2), shall not include the value of deposits, loans or advances on which interest or discount is earned. Further, the recommendation states that this will not apply to a banking company and a financial institution, including a non-banking financial company engaged in providing services by way of extending deposits, loans or advances. However, the Press Release contains a disclaimer that it will be subject to further vetting during which the list of recommendations may undergo some changes. At this stage, the taxpayers can only hope that this recommendation would be given effect to in the form of a suitable amendment to the CGST Rules, 2017.

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