220/14/2024-GST — Clarification on place of supply applicable for custodial services provided by banks to Foreign Portfolio Investors
Summary
This circular clarifies where the GST will be levied when Indian banks provide custodial services to FPIs. Custodial services basically involve safekeeping of securities like shares and bonds, along with related administrative tasks. The circular states that the "place of supply" for these services is the location of the recipient of the service. In this case, since the recipient is the FPI and they are located outside India, the place of supply becomes outside India.
This means that providing custodial services to FPIs is considered an export of services. Consequently, GST will not be applicable, provided the other conditions for export of services are met (like receiving payment in foreign currency).
This clarification impacts Indian banks offering custodial services to FPIs. These banks now need to ensure they meet all the conditions for export of services under the GST law to avoid paying GST on these services. There are no immediate deadlines to comply, but banks should immediately review their current practices and invoices to align with this clarification. If they have incorrectly paid GST on these services in the past, they should consult with their tax advisors on claiming refunds. The intention is to ensure consistency in GST application across the banking sector.
Key Changes
| Change | Impact |
|---|---|
| Clarification on Place of Supply: The circular clarifies that the place of supply for custodial services provided by banks to Foreign Portfolio Investors (FPIs) is the location of the recipient of services (i.e., the FPI). | This removes ambiguity regarding the place of supply, ensuring correct GST application. It simplifies compliance for banks providing custodial services to FPIs, as they now clearly understand where GST should be levied (or not). |
| Application of IGST: Since the place of supply is outside India (location of the FPI), the services are treated as export of services, and are thus subject to IGST at a rate of 0% if conditions for export are met, or the bank can claim refund of taxes paid on inputs. | Banks can now treat these services as exports if the conditions are fulfilled. This enhances the competitiveness of Indian banks in providing custodial services to FPIs. |
| Definition of 'Custodial Services': The circular implicitly defines custodial services in the context of FPIs, encompassing safekeeping of securities, handling corporate actions, and other related activities. | This provides a clearer understanding of the scope of services covered under this clarification, reducing potential disputes regarding the applicability of the rule. |
| Relevance to FPI Regulations: The circular is directly linked to the regulatory framework governing FPIs and their investment activities in India. | The clarification aligns GST regulations with the existing FPI framework, ensuring a consistent and predictable tax environment for FPIs investing in India. |