Banks are currently dealing with uncertainty regarding the relevancy of the Goods and Services Tax (GST) to the use of a common brand name across all their branches and subsidiaries, according to sources familiar with the matter.
Some lenders have started receiving GST notices related to using their branch and subsidiary brand name, said the people cited above.
This situation has occurred due to recent decisions taken in Tamil Nadu, Maharashtra, and Karnataka by their respective Authority for Advanced Rulings (AAR) branches, which stipulate that each entity within a bank with a separate GST number should be treated as a distinct entity for tax purposes.
The tax department argues that this constitutes a free service to respective parties and is therefore liable to GST.
If this is considered a service, banks will need to determine the value of such services, and GST will be applicable to this value.
An inquiry sent to the finance ministry through the email requesting comments is still yet to be answered.
A tax expert explained that the legal fiction created by the law to recognize branch offices as separate entities for GST aims to ensure that credit belonging to a particular state stays within that state.
However, the use of a common brand by different branches is a crucial aspect of conducting business, and it is not intended to be a service from one office to another. The expert further added that the GST Council should address this issue to prevent prolonged legal disputes.
The use of bank brand names by group companies is also a grey area, as all major Indian banks have subsidiaries in mutual funds, insurance, and other sectors that use the same brand name.
In the matter of banks, where the logo or brand is used by their subsidiaries, it becomes a critical issue to consider whether this determines a supply or is a structural function of the holding company. Tax experts, recommend issuing a clarification by the Central Board of Indirect Taxes and Customs to avoid litigation.
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This situation indicates two major challenges for banks- first, they would need to calculate the value of their brand, which is a complex process. In the case of banks, it is merely not the absence of consideration but the absence of service as well, said a tax expert. If these cases are dealt with the right approach, they can be presented before the high court for jurisdiction to seek relief.
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Second, they would not be eligible to claim a full input tax credit (ITC) for it. While GST rules allow non-financial banking companies and banks to claim 50% ITC against services and capital goods, if the use of the brand name is subject to GST, banks can only claim half of the GST paid as input credit, unlike most other sectors that are eligible for 100% ITC under GST laws.
