The Goods and Services Tax (GST) regime has brought about significant changes in tax compliance for businesses in India. Among the myriad issues faced by taxpayers is the question of GST applicability on charges deducted by foreign banks in export transactions. This article delves into a recent case, shedding light on the complexities surrounding the matter and the applicable legal provisions.
Key Legal Provisions
- Section 2(93) of CGST Act: Defines the recipient of service as the person liable to pay consideration.
- Notification
No. 10/2017-IGST(Rate): Specifies the services subject to RCM,
including those provided by a person in a non-taxable territory.
- Section
13 of the IGST Act: Details the place of supply for services where
either the supplier or recipient is outside India.
Analysis of the Issue
Lack of Direct Contractual Relationship
Foreign banks deduct charges while processing export
remittances. However, exporters do not have a direct contractual relationship
with these banks. The Indian bank acts as the intermediary, engaging the
foreign bank for services. Under international rules such as URC 522 and UCP
600, it is evident that the foreign bank’s services are rendered to the Indian
bank, making the latter the recipient of service under GST law.
Place of Supply and Reverse Charge Mechanism
As per Notification No. 10/2017-IGST(Rate), services
provided by a foreign bank to an Indian bank are taxable under RCM. Section
13(8)(a) of the IGST Act further clarifies that the place of supply for banking
services is the location of the service provider—in this case, the foreign
bank. Consequently, the Indian bank is liable to discharge GST on these charges
under RCM, not the exporter.
Judicial Precedents
Several rulings support the position that exporters are not
liable for GST on foreign bank charges:
- Theme
Exports Pvt. Ltd. vs. Commissioner of Service Tax: The tribunal held
that exporters, lacking direct contracts with foreign banks, are not
service recipients under GST or Service Tax law.
- SKM
Egg Products Export (I) Ltd. vs. Commissioner of Central Excise: It
was clarified that foreign banks’ services are rendered to Indian banks,
and exporters cannot be considered service recipients.
- Greenply
Industries Ltd. vs. CCE: Reiterated that charges deducted by foreign
banks for remittances do not make exporters liable for service tax.
GST Council’s Recommendations
The 47th GST Council Meeting affirmed that foreign bank
services provided to Indian banks are taxable under RCM, with Indian banks
entitled to Input Tax Credit (ITC). This neutralizes the tax impact for the
banking sector and avoids burdening exporters.
Contrary View
Commissioner of Central Excise and Service Tax Alwar vs.
State Bank of Bikaner and Jaipur: In Service Tax Appeal No. 51138 of 2017,
heard by the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) on
August 5, 2020, the tribunal observed that Indian banks act as mediators
between exporters and foreign bankers representing importers. Indian banks are
not the recipients of services provided by foreign banks, and thus, charges
collected by foreign banks are not subject to service tax under reverse charge.
Furthermore, the CESTAT clarified that for service tax under
the category of ‘Banking and Financial Services,’ the services must be provided
in India. Since foreign banks do not transact banking business in India, they
do not meet the definition of a ‘banking company’ under Indian law, which is a
prerequisite for levying service tax in this category.
While the Central Board of Indirect Taxes and Customs (CBIC)
issued a clarification under the GST regime contrary to CESTAT’s view—stating
that Indian banks receive services from overseas correspondent banks—the
judgment’s rationale is relevant for understanding taxability under the GST
framework as well.