Deposit insurance: IT department questions banks to claim an input tax credit on the premium

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Highlights

  • Banks pay a premium to DICGC to protect depositors’ money. In addition, banks pay 18% GST on the insurance premium.
  • Most banks view this GST as a cost and add it to the available input tax credit.
  • Now the indirect tax department is asking banks to claim an input tax credit on the GST paid for insurance premiums.

New Delhi: Bank deposits up to Rs 5 lakh per depositor are now insured by the Deposit Insurance and Credit Guarantee Company (DICGC). Banks pay a premium to DICGC to protect depositors’ money. In addition, banks pay 18% GST on the insurance premium.

Most banks view this GST as a cost and add it to the available input tax credit. It should be mentioned here that the input tax credit is the GST paid on input services or raw materials that can be deducted from some type of future tax liability.

Now the indirect tax department is asking banks to claim an input tax credit on the GST paid for insurance premiums, the Economic times mentioned in a report. This move could result in increased costs – up to Rs 250 crore to Rs 800 crore per year – for major banks including State Bank of India, Bank of Baroda, Punjab National Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank and IndusInd Bank.

Under the GST framework, banks can only claim half of the input tax credit available to them.

The tax service claims that the insurance premium does not correspond to the “basic” function of banks.

Since most of the services that banks provide to term deposit holders are free, the tax credit cannot be used against outgoing GST either, he says.

“Any denial of a business expense tax credit goes against the fundamentals of the service tax and the GST, especially when banks already have a half-credit-only option. The conflicting rulings only add to the fiscal uncertainty, which should be resolved soon, ”said the financial daily quoted by Abhishek Rastogi, partner at Khaitan & Co, a law firm.

“We think this is an unnecessary controversy, our position is that this is a service that we render to the customer and therefore should receive an input tax credit,” said the post citing an anonymous banker. “Since deposit insurance coverage was increased to Rs 5 lakh, our costs have increased and a relaxation in the input tax claim or its offset with other claims should be a respite for us. “

While no bank has yet received a notice from the tax department, it might only be a matter of time before they do, the financial daily said citing tax experts.

Under existing tax laws, a debate is ongoing as to whether the costs that a business or financial institution incurs due to a regulatory requirement should be considered critical and whether an input tax credit should be available. in this regard.

“Payment of the premium is a mandatory requirement to protect the interests of all stakeholders and denial of credit will lead to a cascading tax increase, as the input tax credit will also increase with an increase in the cost of the premium. “said Rastogi.


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