INPUT TAX CREDIT FOR FINANCIAL INSTITUTIONS

[Mr. M. GOVINDARAJAN]

Financial institution

The explanation to section 18(8) of Integrated Goods and Services Tax Act, 2017 defines the expression ‘financial institution’ as having the same meaning as assigned to it in clause (c) of section 45-I of the Reserve Bank of India Act, 1934.

Section 45-l(c) of the Reserve Bank of India Act, 1934 defines the expression ‘financial institution’ as any non-banking institution which carries on as its business or part of its business any of the following activities, namely-

• the financing, whether by way of making loans or advances or otherwise, of any activity other than its own;
• the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature;
• letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972;;
• the carrying on of any class of insurance business;
• managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto;
• collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person, but does not include any institution, which carries on as its principal business,--

• agricultural operations; or
• industrial activity; or
• the purchase, or sale of any goods (other than securities) or the providing of any services; or
• the purchase, construction or sale of immovable property, so, however, that no portion of the income of the institution is derived from the financing of purchases, constructions or sales of immovable property by other persons;

The explanation to this section defines the expression ‘industrial activity” as any activity specified in sub clauses (i) to (xviii) of clause (c) of section 2 of the Industrial Development Bank of India Act, 1964.

Section 45-I(e) defines the expression ‘non-banking institution’ as a company, corporation or co-operative society.

Input tax credit for financial institution

Section 17(4) of the Central Goods and Services Tax Act, 2017 provides for the procedure for availing of input tax credit by the financial institutions.  The said section provides that a banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.

The option once exercised shall not be withdrawn during the remaining part of the financial year.   The restriction of 50% shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.

Section 17(2) of the Central Goods and Services Tax Act, 2017 provides that where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

Therefore the financial institution is given option to adopt the provisions of section 17(2) of the Act or avail the option of availing 50% of input tax credit and the rest shall lapse.

Advance Ruling

In re ‘The Knanaya Multi Purpose Co-operative Credit Society Limited’- 2020 (8) TMI 518 - AUTHORITY FOR ADVANCE RULING, KERALA, the applicant is a Co-operative society registered with the Central Registrar of Co-operative Societies engaged in the business of accepting deposits and granting loans and advances.   The applicant is engaged in provision of both taxable as well as non-taxable services and are availing input tax credit as per provisions of Section 17(2) of the CGST/SGST Act. 

The applicant sought for advance ruling on the following questions-

• Whether the applicant is considered as a financial institution as envisaged under 17(4) of the CGST Act.?
• Whether the applicant is eligible for availing the option provided under Section 17(4) of the CGST Act which prescribes to avail an amount equal to 50% of eligible credit of input tax on inputs, capital goods and input services in that month and the rest shall lapse?

The applicant claims that being a financial institution, they are eligible for availing of input tax credit by exercising the option provided under Section 17(4) of the CGST/SGST Act which provides that a banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.   The applicant being a cooperative society registered with Central Registrar of Co-operative Societies engaged in the business of financing, by way of loan or advance, of any activity other than its own is qualified as a financial institution under the RBI Act, 1934.

The Authority for Advance Ruling observed that the conditions to be fulfilled for exercising the option under sub-section (4) of Section 17 is that the supplier shall be engaged in supplying services by way of accepting deposits, extending loans or advances and the supplier shall be a banking company, a financial institution or a non-banking financial company. Both the conditions shall be simultaneously satisfied to be eligible to exercise the option as provided under sub-section (4) of Section 17 of the CGST Act, 2017.

The Authority for Advance Ruling further observed that the applicant is engaged in supplying services by way of accepting deposits, extending loans or advances. The terms banking company, a financial institution or a non-banking financial company are not defined under the CGST Act, 2017. However, the terms are defined in the explanation to sub-section (8) of Section 18 of the Integrated Goods and Services Act, 2017. Even though, the definition in the explanation is for the purpose of that sub-section, the definition can be adopted in the instant case also as the terms are not elsewhere defined in the IGST Act or the CGST Act.  On a conjoint reading of the provisions of clauses (c) and (e) of Section 45-1 of the Reserve Bank of India Act, 1934 it is evident that the applicant being a Co-operative Society registered with the Central Registrar of Co-operative Societies carrying on the business of financing whether by means of making loans or advances or otherwise, of any activity other than its own qualifies to be a “financial institution” as per the Reserve Bank of India Act, 1934 and consequently also under the CGST Act, 2017.

The Authority for Advance Ruling ruled that the applicant satisfies both the conditions to be eligible for exercising the option provided under sub-section (4) of Section 17 of the Central / State GST Act, 2017.