Indian banks will not have to pay goods and services tax (GST) on reverse charge mechanism for facilitating trade for exporters or importers through foreign banks, if a recent ruling by an appellate tribunal is to go by.
In a Rs 110-crore relief to State Bank of Bikaner & Jaipur (SBBJ), now merged with State Bank of India, the Delhi Customs, Excise Service Tax Appellate Tribunal (CESTAT) has ruled that the bank is not liable to pay the erstwhile service tax on a reverse charge mechanism. This is because it was not the recipient of any service rendered by the foreign bank and no consideration was paid by it.
The case may act as a precedent for other service tax and GST cases, where banks may been held liable to pay tax on reverse charge for merely being facilitators for exporters or importers.
To facilitate trade, Indian banks provide services to exporters by sending the export documents to the bank of the importer abroad and collect payment. The role of the Indian bank, SBBJ in this case, is to settle the payment relating to export/import of trade, for which it charges service tax to the exporters. All such foreign trade transactions have to be necessarily routed through normal banking channels as is provided for in the Foreign Exchange Management Regulations.
In a 2017 order, commissioner of central excise and service tax had served SBBJ a demand of Rs 110.84 crore towards service tax. It came with interest and penalty for not paying service tax on foreign bank charges under the reverse charge mechanism for the period between October 2010 and March 2015.
The CESTAT, in its 39-page order, said the bank cannot be said to be the recipient of service for the activities undertaken by the foreign banks situated outside India, the charges for which are deducted at source on the export bill. The appellant bank merely acts on behalf of the Indian exporter and facilitates the service. “The appellant bank, therefore, would not be liable to pay service tax under the reverse charge mechanism,” the order said.