With concerns rising over the recent GST slab rates revision, set to come into effect from July 18, thereby yet again increasing prices on several items for consumers already crippled by inflation, yet another GST revision looks set to be on the cards. The Tax Department, in recent meetings with representatives of all the major banks around the country, has brought up the issue that banks ought to be charging consideration or royalties from their subsidiaries and other related parties who are allowed to use the parent company's brand indicators and trademarks, and that a 18% GST is liable to be imposed upon these transactions.
Issue of Bank Subsidiaries using Parent Company's Brand name and Trademarks
This issue had previously been raised vide a letter in February, issued by the Tax Department to one of the major banking chains, wherein they had pointed out that services of supplying brand name, logo and tagline were being provided by the parent company to the subsidiary, however no royalties or fees are being charged and no invoices being raised. In ordinary practices, most banks do not charge royalties from their subsidiaries (such as their mutual funds unit, credit card departments, and other ancillary services) using trade indicia such as the bank's trademarks, logos or taglines, or charge only a flat rate payable as a lump sum.
The Issue: Cause and Effects
Experts say that this move comes as States are rallying to spruce up GST revenue collection now that the Centre is looking to withdraw GST compensation to them. With April's GST collection having shown a robust 20% hike in returns, which exceeds the States' protected revenue growth rate of 14% backed by GST compensation from the Centre, it is likely that the Centre will be announcing cessation of this compensation, thereby leaving the States to fend for themselves to maintain an upward trajectory in revenue collection, and devise new avenues once the guaranteed backend support from the Centre dries up. The Centre has also claimed to have cleared all GST dues to States up till May 31, 2022, in preparation for withdrawal of their existing support.
'Supply of Service' under GST
For levy of GST to be applicable on the supply of goods or services or both, the transaction must fulfil certain criteria1:
- Supply of goods or services- The transaction must involve an exchange of goods, or services, or both. Supply of anything other than goods or services does not attract GST;
- Supply should be made for a consideration- While the consideration need not only be confined to money, it is necessary that there be a value exchange to attract GST;
- Supply should be made in the course or furtherance of business;
- Supply should be made by a taxable person;
- Supply should be a taxable supply;
- Supply should be made within a taxable territory.
While these six parameters describe the concept of supply, there are a few exceptions to the requirement of supply being made for a consideration and in the course or furtherance of business. Any transaction involving supply of goods or services without consideration is not a supply, barring few exceptions, in which a transaction is deemed to be a supply even without consideration.
The Central and State governments have simultaneous powers to levy the GST on IntraState supply under the GST Act. However, the Parliament alone has the exclusive power to make laws with respect to levy of Goods and Services Tax on Inter-State supply.
A transaction between a company and its subsidiary is liable for levy of GST under the GST Rules, even if there is no consideration paid. The Tax Department's argument states that there is a 'supply' taking place between the custodians of the brand - the bank - and its subsidiaries or related parties, including mutual fund units, credit card departments, loan offices, namely any affiliate using its brand indicia. As per GST law, in such cases, 'supply of brand' is deemed to have taken place, from the parent company to the subsidiary, which is in the course of business, and liable to payment of royalty or a similar fee.
However, banks and their representatives are sceptical as to whether they can be made to impose royalty on their own subsidiaries and whether there exists in fact an actual transfer of rights for tax levy.
This new tax, if imposed on banks, will lead to dues of thousands of crores coming into State revenue from GST collection. However, it is likely to increase the prices of services offered by banks, and perhaps even lead to levy of charges on services which have so far been free.
1 Section 7, GST Act, 2017.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.