E-invoicing is the new household word in the country which has caused a stir in recent times. The GST Council has rolled out the first phase of E-invoicing from 1 October 2020. While a lot has been said and discussed E-invoicing, there are certain grey areas that need to be addressed. One such area is the applicability of E-invoicing provisions to the banks and other financial institutions.
Banks and Financial Institutions are organizations whose primary business activity is lending and borrowing money. However, there are many other activities such as bullion trading, sale of assets/ scrap, NPA liquidation, etc. which are imperative in a bank’s functioning. It is this varied set of activities that has led to the confusion of whether E-invoicing would be applicable to the financial sector.
Before proceeding on to the analysis, lets us first examine the legislative provisions in this regard:
- Rule 54(2) of the CGST Rules, 2017 has been reproduced below:
“Where the supplier of taxable service is an insurer or a banking company or a financial institution, including a non-banking financial company, the said supplier may issue a consolidated tax invoice or any other document in lieu thereof, by whatever name called for the supply of services made during a month at the end of the month, whether issued or made available, physically or electronically whether or not serially numbered, and whether or not containing the address of the recipient of taxable service but containing other information as mentioned under rule 46.”
- CBIC vide Notification No. 13/2020-Central Tax dated 21 March 2020 excludes persons referred under Rule 54(2) of the CGST Rules, 2017 from the applicability of issuance of E-invoice for the supply of goods or services or both to another registered person.
Interpretation Of Law
The CBIC vide the aforementioned Notification exempted persons referred under Rule 54(2) of CGST Rules, 2017 from the applicability of E-invoicing. Rule 54(2) refers to banks, NBFCs, financial institutions that supply taxable services.
The fact that banks and other Financial Institutions (FIs) have revenue from a gamut of activities other than their supply of taxable service, has given rise to an anomaly. The confusion that prevails is whether the exemption from E-invoicing is only for ‘taxable services’ (as given under Rule 54(2)) or is it entity-wide (i.e. for all activities carried out by banks, NBFCs, and FIs)
On a plain reading of the above provisions, two contradictory views transpire:
- Notification No. 13/2020-CT specifically excludes persons referred to under Rule 54(2) from the applicability of E-invoice for goods and/or services and not a specific category of supplies. Further, Rule 54(2) refers to insurer, Banks, FI, and NBFCs – Accordingly, all supplies undertaken by the Banks, FI, and NBFCs to registered persons irrespective of nature of supplies shall be excluded from applicability.
- Rule 54(2) refers to suppliers of taxable services. Being an insurer, bank, FI, or NBFC, such persons may issue a consolidated invoice for the supply of services made by them. However, where banks, FI, and NBFCs are suppliers of both, taxable and exempt services/ goods, they shall not be covered by the exclusion of Notification No. 13/2020- CT on the applicability of E-invoice. This may be true in the case where banks become suppliers of goods such as bullion trading, sale of assets, and sale of scrap.
In the FAQs on the official website of the GSTN, reliance can be placed on the following:
“Q: Which entities/persons are exempt from the E-invoice mandate?
Ans: a. Special Economic Zone Units
- An insurer or a banking company or a financial institution, including a non-banking financial company
- goods transport agency supplying services in relation to transportation of goods by road in a goods carriage
- Suppliers of passenger transportation service
- Suppliers of services by way of admission to the exhibition of cinematograph films in multiplex screens”
“Q: The exemption from E-invoicing is w.r.t the nature of supply/transaction or w.r.t the entity?
Ans: It is for the entity.”
Thus, the FAQs resonate with View 1 above, that E-invoicing is not applicable to FIs, banks, NBFC, etc. as an entity, irrespective of transactions undertaken. Further, if the policymakers had an intent to provide transaction-specific exclusion, then the entry should have been worded like the GTA entry – ‘services in relation to transportation of goods by road’.
However, an opposite view was endorsed by the CBIC and GSTN officials in their public webcasts, webinars wherein it was verbally asserted that exclusion from the applicability to E-invoice is only for banking business; any other business carried on by banks will require compliance with E-invoicing procedures where turnover exceeds 500 crores.
Further, vide the same webcasts, it was clarified that to check the applicability of E-invoice, one could refer to the website link einvoice1-trial.nic.in. With the help of this link, when one reviews the applicability of E-invoice to top banking vendors, it can be observed that this link issued by GSTN officials suggest that E-invoice has been enabled for such banking vendors for the entire GSTIN.
At this juncture, it is pertinent to note that from the perspective of indirect tax laws, there lies no distinction between banking business and non-banking business carried out by banks, FIs, NBFCs, etc. This is apparent from the fact that the licensed / regulated businesses of banks, FI, NBFCs are governed by the RBI or Banking Regulation Act, 1949. These businesses shall essentially qualify as banking businesses only. Accordingly, trading in bullion or selling assets should be a part of excluded transactions for the purpose of E-invoice as the same has been permitted in the governing law (Banking Regulation Act 1949). However, where this stream of business is registered as a separate business division, the interpretations change. This inference can also be supported by the inverse reading of GST FAQ 18 issued by CBIC in respect of Bankers, Insurers and Stock Brokers dated 27 December 2018 which states that – 50% reversal of input tax credit will be applicable on input credit for bullion trading unless registered as separately under GST.
On the other hand, under the Service tax regime and the current SAC 9971, the definition of banking and financial services excludes the supply of goods that are closely linked with the banking business. Accordingly, it can be construed that the services listed under SAC 9971 can only qualify as activities which shall be treated as excluded for the purpose of E-invoicing. Nonetheless, it cannot be ignored that GST i a tax on the supply of taxable supplies and not merely the provision of taxable services. Therefore, the above interpretation may not hold ground as it would limit banking activities only to the provision of services leading to a regressive interpretation of the law.
Due to the ambiguity present in the legislative provisions, most of the industry players have adopted a conservative stand of implementing E-invoice from 1 October 2020. However, clarification from the authorities would be most welcomed especially for the organizations that have not yet implemented it relying on interpretation no. 1 above. In such a case, it would be better to write to firstname.lastname@example.org explaining their stand and exclusion from applicability, as per instruction given on the E-invoice portal.