2020 (7) TMI 478 - AAR - GST

Input Tax Credit - inward supply for the purpose of Banking Business - apportionment of credit - blocked credit - HELD THAT - Benefit of Section 17(4) of Banking Regulations Act should be allowed.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) pertain to the entitlement of input tax credit (ITC) under the Goods and Services Tax (GST) regime for a banking company in relation to GST paid on premium paid to the Deposit Insurance and Credit Guarantee Corporation (DICGC). Specifically:

Whether the applicant bank, engaged in banking and financial services, is entitled to avail input tax credit on GST paid on DICGC premium, which is a statutory requirement for deposit insurance?
Whether the bank's exercise of the option under Section 17(4) of the CGST/SGST Act, 2017 to avail only 50% of eligible ITC on inputs, capital goods, and input services in a taxable period is lawful and proper in relation to GST paid on DICGC premium?
What is the applicable legal framework governing the entitlement and apportionment of input tax credit for banking companies under the CGST/SGST Acts, particularly Sections 16, 17, and Rule 38 of the CGST Rules, 2017?

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to Input Tax Credit on GST paid on DICGC Premium

Legal Framework and Precedents: The relevant provisions are Sections 16 and 17 of the CGST Act, 2017, which govern eligibility and conditions for taking input tax credit, and the apportionment and blocking of credits. Section 16(1) entitles every registered person to take credit of input tax charged on supplies used or intended to be used in the course or furtherance of business. Section 17(4) provides a special option for banking companies and financial institutions regarding apportionment of credit. Rule 38 of the CGST Rules, 2017 prescribes the procedure for claiming credit by banking companies.

Court's Interpretation and Reasoning: The AAR noted that the applicant bank is engaged exclusively in banking and related financial services, some of which are taxable and some exempt under GST. The bank pays GST on its outward taxable supplies and collects the tax accordingly. The premium paid to DICGC is a statutory obligation for deposit insurance on deposits accepted in the course of the bank's business.

The Authority observed that the GST paid on the DICGC premium constitutes an inward supply used in the course or furtherance of business, thus prima facie eligible for input tax credit under Section 16(1). The bank's claim to avail credit on this inward supply is therefore justified, subject to applicable restrictions.

Key Evidence and Findings: The applicant bank submitted that it pays GST on DICGC premium and avails only 50% of the eligible ITC in accordance with the option under Section 17(4). The bank's outward supplies include taxable and exempt services, necessitating the apportionment of ITC.

Application of Law to Facts: The Authority applied Section 16(1) to confirm that input tax credit is available if the supply is used in the course or furtherance of business. Since deposit insurance is a statutory requirement linked directly to deposits accepted in business, the GST paid on DICGC premium is an input service used in business.

Treatment of Competing Arguments: While the Authority did not explicitly record opposing arguments, the analysis implicitly addresses concerns about the proportionate credit allowed due to exempt supplies by referencing Section 17(4), which specifically provides an option for banking companies to claim 50% of eligible credit.

Conclusion: The bank is entitled to avail input tax credit on GST paid on DICGC premium, subject to the restrictions and options provided under the GST law.

Issue 2: Legality and Application of Section 17(4) Option for Banking Companies

Legal Framework and Precedents: Section 17(4) of the CGST Act allows banking companies and financial institutions to either comply with the apportionment provisions under Section 17(2) or opt to avail 50% of the eligible input tax credit on inputs, capital goods, and input services every month, with the remainder lapsing. This option, once exercised, cannot be withdrawn during the financial year. Rule 38 prescribes the procedural compliance for availing credit under this option.

Court's Interpretation and Reasoning: The Authority examined the applicant's exercise of the Section 17(4) option, noting that the bank avails 50% of eligible ITC monthly and does not claim the remainder, consistent with the statutory provision. The Authority emphasized that adherence to the procedure and conditions under Rule 38 is mandatory for the lawful exercise of this option.

Key Evidence and Findings: The applicant bank's statement and filings confirm that it follows the option under Section 17(4) and complies with Rule 38 requirements. The bank claims 50% of ITC on inputs including GST paid on DICGC premium.

Application of Law to Facts: The Authority applied the statutory provisions and rules, concluding that if the bank strictly follows the procedure under Rule 38, it is entitled to avail the benefit of Section 17(4) and claim 50% of the eligible ITC instead of undergoing the more complex apportionment under Section 17(2).

Treatment of Competing Arguments: The Authority implicitly rejects any argument that the bank must apply Section 17(2) apportionment by affirming the validity of the Section 17(4) option, provided procedural compliance.

Conclusion: The bank's exercise of the option under Section 17(4) to claim 50% of eligible ITC is lawful and proper, subject to strict compliance with Rule 38.

Issue 3: Procedural Compliance under Rule 38 of CGST Rules, 2017

Legal Framework and Precedents: Rule 38 details the procedure for banking companies and financial institutions opting under Section 17(4), including conditions on non-business use, blocked credits, and credit admissibility.

Court's Interpretation and Reasoning: The Authority underscored that the bank must follow the procedural requirements of Rule 38, including exclusion of credits on inputs used for non-business purposes and blocked supplies as per Section 17(5). The rule also mandates furnishing details in FORM GSTR-2 and crediting the electronic ledger accordingly.

Key Evidence and Findings: The bank confirmed adherence to these procedural requirements in its application and submissions.

Application of Law to Facts: The Authority held that strict compliance with Rule 38 is a precondition for availing the Section 17(4) option and the corresponding ITC benefits.

Conclusion: Procedural compliance under Rule 38 is mandatory; upon such compliance, the bank's claim to ITC on GST paid on DICGC premium under Section 17(4) is valid.

SIGNIFICANT HOLDINGS

The Authority held:

" / , 2017 38 / , 2017 17 (2) 17 ( 4 ) "

Core principles established include:

Input tax credit on GST paid on statutory deposit insurance premium is admissible as it is an inward supply used in the course or furtherance of business.
Banking companies have a statutory option under Section 17(4) to claim 50% of eligible ITC monthly instead of apportionment under Section 17(2), provided they comply with Rule 38.
Strict procedural compliance with Rule 38 is essential to lawfully avail the Section 17(4) option and corresponding input tax credits.

Final determinations:

The applicant bank is entitled to avail input tax credit on GST paid on DICGC premium.
The bank's exercise of the 50% ITC option under Section 17(4) is valid and lawful.
Compliance with Rule 38 procedures is mandatory for claiming such credit.

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