Major banks face increased costs of Rs 250 to Rs 800 crore on input tax credit on insurance paid to Deposit Insurance and Credit Guarantee Corporation (DICGC) by them on fixed deposits after the hike in insurance of deposits to Rs 5 lakh from Rs 1 lakh
The indirect tax department is questioning banks on the status of input tax credit (ITC) on the insurance paid to the DICGC.
All banks are required to insure this amount with the DICGC and pay a premium on that sum, for which an 18% GST rate is applicable.
Input tax credit
Input tax credit is GST paid on input services or raw materials that can be set off against a certain kind of future tax liability.
The indirect tax department is contesting the availability of input tax credit on insurance premiums.
Banks may have to shell out not only higher premiums and also incur higher tax costs due to credit disputes.
The indirect tax department claims the insurance premium paid by banks is not towards taxable output services and so they cannot input tax credit. As per the GST framework, banks can only avail half of the input tax credit available to them. The tax department claims the insurance premium is not towards the “core” function of banks.
Since most services provided by banks to fixed deposit holders are free, the tax credit cannot be used against any outgoing GST as well, it says.
SBI, Bank of Baroda, Punjab National Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank and IndusInd Bank are the major banks that may be affected.
Under the existing tax laws, there is an ongoing debate as to whether any cost that a company or a financial institution incurs due to a regulatory requirement should be considered crucial, and whether input tax credit should be available on that.
Source: Economic Times