The Maharashtra Goods and Services Tax (GST) department has sent notices to several banks on the taxability of custodial services provided by them to foreign portfolio investors (FPIs).

The state GST authorities have taken the stand that the custodial services provided by these SEBI-registered custodian banks do not qualify as zero-rated supplies for the purpose of exports.

The banks are now staring at a few hundred crore rupees in taxes and penalty.

FPIs investing in India avail the services of custodian. Banks treat this as export of services because they are rendering services to FPIs who are located outside India and earning fees in foreign currency.

“There is no GST applicable on invoice raised on FPI for custodial services provided the payment is received in foreign currency as a remittance and into the account of the service provider, and not into the FPI account,” said a custodian.

GST department’s take

The view of the GST department is that the banks are rendering services to FPIs who are essentially account holders. According to section 13(9) of the Integrated Goods and Services Tax (IGST) Act, 2017, if a bank provides services to an account holder then the place of supply would be where the bank is located, which is India in this case. Hence, the custodians’ service does not qualify as an export.

The account, however, should be an interest bearing account. The banks believe that the department’s interpretation is incorrect as the accounts in question need to be an interest bearing account. Since FPIs do earn any interest on the account, section 13 (9) is not applicable.

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Section 13(3) of the IGST Act says that place of supply would be the location where the services are actually performed. The department believes that since the custodian is handling shares of FPIs in India, their service is not an export.

The section, however, is only applicable to services supplied in respect of goods which are required to be made physically available.

‘Shares are not goods’

“According to GST, shares are not considered as goods. Goods means any movable property except shares, securities and bonds. Goods should be physically provided but the shares are in dematerialised form. If shares are not goods, then 13(3) of IGST is not applicable and the residual provision applies, according to which the place of supply should be outside India,” said a partner of a consultancy firm.

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Most of the banks acting as custodians are registered in Maharashtra. These have now reached out to the Ministry of Finance to keep custodian services out of the GST, per reports.

Last year, SEBI announced that GST would be levied on registration fees and annual fees received by it with effect from July 18, 2022. GST will also be applicable on fees paid by custodians based on assets they manage.

There are over 11,000 FPIs registered in India