On July 08, 2024, the Government of West Bengal issued clarification regarding the place of supply for custodial services provided by banks to Foreign Portfolio Investors (FPIs). This clarification addresses the concerns raised by various stakeholders about the appropriate GST provisions applicable to these services.
Understanding Custodial Services
Custodial services, as defined under the Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996, include the following:
- Safekeeping of Securities: Ensuring the security and maintenance of the client’s securities.
- Maintaining Accounts: Keeping detailed accounts of the client’s securities.
- Collecting Benefits: Collecting any benefits or rights accruing to the client in respect of their securities.
- Client Communication: Informing clients of any actions taken or to be taken by the issuer of securities that may affect the client’s benefits or rights.
- Record Maintenance: Maintaining and reconciling records of the above services.
Place of Supply Under IGST Act
The key issue addressed in the clarification is the determination of the place of supply for custodial services provided to FPIs.
- Section 13(8)(a) of the IGST Act: Some field formations have been interpreting custodial services as falling under Section 13(8)(a) of the Integrated Goods and Services Tax (IGST) Act, 2017. This section deals with the place of supply of services directly related to an account holder. However, the clarification indicates that custodial services provided to FPIs should not be treated as services provided to ‘account holders’ under this section.
- Reference to Service Tax Regime: The provisions of Section 13(8)(a) of the IGST Act are similar to Rule 9(a) of the Service Tax Place of Provision of Supply Rules, 2012. The guidance provided in the Service Tax Education Guide, which was used under the previous service tax regime, is considered equally applicable under the GST regime.
Key Clarification
- Exclusion from Section 13(8)(a): Custodial services provided by banks or financial institutions to FPIs are not covered under Section 13(8)(a) of the IGST Act. This means these services are not treated as provided to ‘account holders’ for the purpose of determining the place of supply.
- Default Provision (Section 13(2) of the IGST Act): Instead, the place of supply for such custodial services must be determined under the default provision, which is sub-section (2) of section 13 of the IGST Act. According to Section 13(2), the place of supply of services, except in specific cases, shall be the location of the recipient of services.
Implications for Banks and FPIs : This clarification brings much-needed clarity to the treatment of custodial services under GST:
- Banks and Financial Institutions: Must apply the default provision (Section 13(2)) when determining the place of supply for custodial services provided to FPIs. This ensures proper compliance with GST regulations and avoids potential disputes or incorrect tax filings.
- Foreign Portfolio Investors: Benefit from a clearer understanding of the GST implications on the custodial services they receive. Helps in ensuring that the correct tax jurisdiction is applied, aligning with their expectations and contractual agreements.
The Government of West Bengal’s clarification on the place of supply for custodial services provided to FPIs underlines the importance of accurate tax interpretation and compliance. By excluding these services from Section 13(8)(a) and placing them under the default provision, the government has provided a clear pathway for banks and FPIs to follow. This move is expected to streamline GST processes and enhance clarity for all stakeholders involved.
