PRIORITY SECTOR LENDING CERTIFICATE – APPLICABILITY OF GST

[Mr. M. GOVINDARAJAN]

Priority Sector Lending Certificate

Priority Sector Lending Certificates (PSLC) is a tool for promoting comparative advantages among banks while they meet their priority sector lending obligations in India. Banks with a comparative advantage in lending to the priority sector should earn priority sector lending certificates (social credits) while those falling short of the target would be required to buy priority sector lending certificates.

Government of India vide Notification dated February 04, 2016 has specified “Dealing in Priority Sector Lending Certificates (PSLCs) in accordance with the Guidelines issued by Reserve Bank   of India” as a form of business under Section 6 (1)(o) of the Banking Regulation Act, 1949.  

Types of PSLCs

There are four types of PSLCs as detailed below-

• PSLC Agriculture: Counting for achievement towards the total agriculture lending target.
• PSLC SF/MF: Counting for achievement towards the sub-target for lending to Small and Marginal Farmers.
• PSLC Micro Enterprises: Counting for achievement towards the sub target for lending to Micro Enterprises
• PSLC General: Counting for achievement towards the overall priority sector target.

PLSC scheme

• To enable banks to achieve the priority sector lending target and subtargets by purchase of these instruments in the event of shortfall and at the same time incentivize the surplus banks; thereby enhancing lending to the categories under priority sector.
• The seller will be selling fulfillment of priority sector obligation and the buyer would be buying the same. There will be no transfer of risks or loan assets.
• The PSLCs will be traded through the CBS portal (e-Kuber) of RBI. The detailed operational instructions for carrying out the trades are available through the e-Kuber portal.
• Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Local Area Banks (LABs), Small Finance Banks (when they become operational) and Urban Co-operative Banks who have originated PSL eligible category loans subject to such regulations as may be issued by the Bank.
• A bank’s PSL achievement would be computed as the sum of outstanding priority sector loans, and the net nominal value of the PSLCs issued and purchased. Such computation will be done separately where sub targets are prescribed as on the reporting date.
• Normally PSLCs will be issued against the underlying assets. However, with the objective of developing a strong and vibrant market for PSLCs, a bank is permitted to issue PSLCs upto 50 percent of previous year’s PSL achievement without having the underlying in its books. However, as on the reporting date, the bank must have met the priority sector target by way of the sum of outstanding priority sector lending portfolio and net of PSLCs issued and purchased. To the extent of shortfall in the achievement of target, banks may be required to invest in RIDF/other funds as hitherto.
• There will be no transfer of credit risk on the underlying as there is no transfer of tangible assets or cash flow.
• All PSLCs will expire by March 31st and will not be valid beyond the reporting date (March 31st), irrespective of the date it was first sold.
• The settlement of funds will be done through the platform as explained in the e-Kuber portal.
• The nominal value of PSLC would represent the equivalent of the PSL that would get deducted from the PSL portfolio of the seller and added to the PSL portfolio of the buyer. The buyer would pay a fee to the seller which will be market determined.
• The PSLCs would have a standard lot size of ₹ 25 lakh and multiples thereof.
• The fee paid for purchase of the PSLC would be treated as an ‘Expense’ and the fee received for the sale of PSLCs would be treated as ‘Miscellaneous Income’.
• Both seller and buyer shall report the amount of PSLCs (category-wise) sold and purchased during the year in the ‘Disclosures to the Balance Sheet’.

PMLC – goods?

In Reserve Bank of India FAQ on PSLC, it has been mentioned that PSLC may be construed to be in the nature of goods, dealing in which has been notified as a permissible activity under section 6(1) of the Banking Regulation Act, 1949 vide Government of India notification dated 4th February, 2016. PSLC are not securities. PSLC are akin to freely tradeable duty scrips, Renewable Energy Certificates, REP license or replenishment license, which attracted VAT.

GST applicable to PMLC?

Vide circular No. 34/8/2018-GST, dated 01.03.2018 the Tax Research Unit issued certain clarifications.  One among them is for the question - Whether Priority Sector Lending Certificates (PSLCs) are outside the purview of GST and therefore not taxable?

It has been clarified that In GST there is no exemption to trading in PSLCs. Thus, PSLCs are taxable as goods at standard rate of 18% (CGST 9% + SGST 9%) under the residuary S. No. 453 of Schedule III of notification No. 1/2017-Central Tax(Rate). GST payable on the certificates would be available as ITC to the bank buying the certificates.

However, representations have been received seeking clarification regarding the classification and applicable GST rate Priority Sector Lending Certificates.   The matter has been re-examined. GST rate of 18 % under the residual entry at Sl .No. 453 of Schedule III of notification No. 01/2017-Central Tax (Rate) applies only to those goods which are not covered under any other entries of Schedule I, II, IV, V, or VI of the notification. In other words, if any goods are covered under any of the entries of Schedule I, II, IV, V, or VI, the GST rate applicable on them will be decided accordingly, without resorting to the residual entry 453 of Schedule III.   As such PSLCs are classified under heading 4907 and will accordingly attract GST @ 12 %, though duty paying scrips classifiable under the same heading will attract Nil GST[under Sl .No. 122A of Notification No. 2/2017-Central Tax (Rate) dated 28.06.2017, as amended vide Notification No. 35/2017-Central Tax (Rate) dated 13.10.2017].

Again representations have been made by the stakeholders seeking clarification on the following-

• Mechanism for discharge of tax liability on trading of Priority Sector Lending Certificate (PSLC) for the period 1.7.2017 to 27.5.2018.
• GST rate applicable on trading of PSLCs.

The representations of the stakeholders are considered by the Board.  With the approval of the GST Implementation Committee of the GST Council, it is clarified, vide Circular No. 62/36/2018, dated 12.09.2018, that GST on PSLCs for the period 1.7.2017 to 27.05.2018 will be paid by the seller bank on forward charge basis and GST rate of 12% will be applicable on the supply.