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Taxman Questions Banks for Claiming Tax Credit on FD Insurance Premium

Mumbai: Top banks have landed in a tax tangle following the government’s move to safeguard fixed deposits worth up to Rs.5 lakh of depositors.

Earlier, banks used to insure Rs.1 lakh worth of fixed deposits with the Deposit Insurance and Credit Guarantee Corporation (DICGC). But finance minister Nirmala Sitharaman increased the bank deposit insurance to Rs.5 lakhs in the 2021 budget.

The indirect tax department is now questioning banks on the status of input tax credit (ITC) on the insurance paid to the DICGC.

This could result in increased costs – as high as Rs.250 crores to Rs.800 crores per year – for top banks including State Bank of India, Bank of Baroda, Punjab National Bank, ICICI Bank and IndusInd Bank.

If a bank becomes insolvent or faces liquidity issues, customers can now recover Rs.5 lakhs from their total fixed deposits. As per current regulations, all banks are required to insure this amount with the DICGC and pay a premium on that sum, for which an 18% GST rate is applicable.

Most banks consider GST as a cost and add it towards the available input tax credit.

Input tax credit is GST paid on input services or raw materials that can be set off against certain kind of future tax liability.

The indirect tax department is contesting the availability of input tax credit on insurance premiums.

“Any denial of tax credit on business expenditure is against the fundamentals of both service tax and GST, especially when banks are already under an option of only half credits. The contradictory decisions are only adding to tax uncertainty, which is expected to be addressed soon,” said Abhishek Rastogi, partner at Khaitan & Co, a law firm.

Tax experts said banks would have to shell out not only higher premiums but also incur higher tax costs due to credit disputes.

The indirect tax department claims the insurance premium paid by banks is not towards taxable output services and so they cannot input tax credit.

As per the GST framework, banks can only avail half of the input tax credit available to them.

The tax department claims the insurance premium is not towards the “crore” function of banks.

Since most services provided by banks to fixed deposit holders are free, the tax credit cannot be used against any outgoing GST as well, it says.

“We believe that this is an unnecessary controversy, our stance is that this is a service that we are rendering to the customer and hence should qualify for an input tax credit,” said one banker in the know. “Since the incurrence cover on deposits has been hiked to Rs.5 lakhs, our costs have gone up and a relaxation in claiming input tax or setting it off against other claims should come as a reprieve for us.”

Although no bank has yet received any notice from the tax department, it could just be a matter of time before they do, tax experts said.

SBI, Bank of Baroda, Punjab National Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank and Induslnd Bank did not respond to ET’s queries until Sunday press time.

Under the existing tax laws, there is an ongoing debate as to whether any cost that a company or a financial institution incurs due to a regulatory requirement should be considered crucial, and whether input tax credit should be available on that.

“The payment of premium is a mandatory requirement to safeguard the interest of all stakeholders and the denial of credit will lead to higher tax cascading as the input tax credit will also increase with an increase in premium cost,” Rastogi said. S-ET

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