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 lakh 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 crore to Rs 800 crore per year for top banks including State Bank of India, Bank of Baroda, Punjab National Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank and IndusInd Bank.
If a bank becomes insolvent or faces liquidity issues, customers can now recover Rs 5 lakh from their total fixed deposits. As per current regulations, all banks are required to ensure 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 a certain kind of future tax liability.
The indirect tax department is contesting the availability of input tax credit on insurance premiums.