Banking companies and financial institutions have specific rules regarding claiming Input Tax Credit (ITC) under the Goods and Services Tax (GST) Act, 2017. Here’s a breakdown:

Challenge:

• These institutions often deal with supplies that are exempt from GST, like deposits, loans, and advances.
• The standard ITC rules allow claiming credit only for taxes paid on inputs used for taxable supplies.

Option for Banking Companies and Financial Institutions:

• They are not obligatedto follow the standard ITC rules.
• They have the option to claim credit under Section 17(4) of the CGST Act, 2017. This section offers two choices:

1. Comply with proportionate ITC claim: This method involves calculating the ITC based on the proportion of taxable supplies made. This requires maintaining detailed records to demonstrate this proportion.
2. Opt for a simplified 50% ITC claim: This option allows claiming 50% of the total ITC available in each month, irrespective of the proportion of taxable supplies. The remaining 50% of the credit lapses.

Claiming Process:

• The chosen method (proportionate or 50%) needs to be reflected in the GSTR-2 form.
• For the 50% option, details are furnished in the specific section of the form (refer to official guidance for details).

EXAMPLE

Scenario:

• State: Tamil Nadu, India
• Banking company: ABC Bank

Assumptions:

• ABC Bank is registered under GST.
• ABC Bank makes various purchases of goods and services used for both taxable and exempt supplies (e.g., loans, deposits, insurance, security services).
• The total ITC available for the month is Rs. 10 lakh.
• Of this, Rs. 4 lakh ITC is attributable to supplies which are taxable or zero-rated (e.g., insurance for branch office).

Claiming ITC:

ABC Bank has two options for claiming ITC:

Option 1: Claim ITC only for taxable and zero-rated supplies

1. Identify the ITC attributable to taxable and zero-rated supplies (Rs. 4 lakh in this example).
2. Claim the identified ITC amount (Rs. 4 lakh) in Form GSTR-2.
3. The remaining ITC of Rs. 6 lakh will lapse.

Option 2: Claim 50% of the total ITC

1. Claim 50% of the total ITC available (50% of Rs. 10 lakh = Rs. 5 lakh) in Form GSTR-2.
2. This option allows claiming credit even for inputs used in exempt supplies.

Choosing the right option:

In this example, claiming only for taxable and zero-rated supplies (Option 1) might not be optimal as Rs. 6 lakh ITC will lapse. Therefore, claiming 50% of the total ITC (Option 2) might be more beneficial for ABC Bank.

Important Points:

• Banking companies and financial institutions have specific rules for claiming ITC under GST.
• It’s crucial to consult with a tax professional for specific guidance based on the bank’s transactions and applicable rates.
• This example only provides a simplified illustration and does not constitute tax advice.

FAQ QUESTIONS

1. Can banks and financial institutions claim ITC under GST?

Yes, banks and financial institutions registered under GST can claim ITC on inputs, capital goods, and input services used for making taxable supplies (including zero-rated supplies). However, they have special provisions compared to other businesses.

2. What is the special provision for claiming ITC by banks and financial institutions?

Banks and financial institutions have the option to claim 50% of the total ITC available in each month. The remaining 50% is not available for claiming and will lapse.

3. Can banks and financial institutions claim more than 50% ITC?

No, claiming more than 50% ITC is not allowed under the current provisions. However, they can choose to claim the full ITC available for the taxable supplies (including zero-rated supplies) instead of the 50% option.

4. How to opt for claiming full ITC instead of the 50% option?

There is no specific option to choose between the 50% and full ITC claim. Banks need to calculate the ITC available for taxable supplies and claim it through the regular GST return filing process.

5. What documents are required to claim ITC?

Banks and financial institutions need to follow the same documentation requirements as other businesses for claiming ITC. This includes a valid tax invoice or debit note issued by a registered supplier, reflecting the relevant details and tax amount.

6. What are the restrictions on claiming ITC by banks and financial institutions?

The general restrictions on claiming ITC under the GST Act, 2017, also apply to banks and financial institutions. These include:

• ITC cannot be claimed on exempt suppliesor supplies used for personal consumption.
• ITC cannot be claimed on items listed in the negative listunder Section 17(5) of the CGST Act, 2017.

7. Where can I find more information on claiming ITC by banks and financial institutions?

• Government notifications and circulars:These can be found on the website of the Central Board of Indirect Taxes and Customs (CBIC) 
• GST FAQs:Sector-specific FAQs related to banking and insurance can be found on the websites of various state tax departments.
• Consult a tax professional:For specific guidance and advice on claiming ITC in your particular situation, it is recommended to consult a tax professional.

CASE LAWS

The Goods and Services Tax (GST) Act, 2017, provides specific provisions regarding the claim of input tax credit (ITC) by banking companies and financial institutions. While there are no specific landmark court cases solely dedicated to this topic, relevant insights can be drawn from various authorities’ pronouncements and rulings.

Here’s a summary of the key points:

Claiming ITC under Section 17:

• General Rule: As per Section 17(1) of the CGST Act, a registered person can claim ITC on all input taxes paid or payable on supply of goods or services used or intended to be used in the course or furtherance of business.
• Banking and Financial Institutions: Section 17(4) provides an option for these institutions to deviate from the general rule. They can choose not to comply with the detailed credit apportionment method mandated by Section 17(2) and instead avail of a simplified mechanism:
  • Option 1: 50% ITC:Claim 50% of the total eligible ITC on inputs, capital goods, and input services.
  • Option 2: Full credit with detailed apportionment:If they choose this option, they need to follow the provisions of Section 17(2) which require:
    • Identifying and separating ITC attributable to taxable supplies (including zero-rated supplies) from those meant for exempt supplies or restricted under Section 17(5).
    • Claiming ITC only for the taxable portion.