Banks and financial institutions provide a bouquet of services such as lending, borrowing, and investments. These activities involve various financial instruments like cheques, drafts, promissory notes, commercial papers, certificates of deposit, derivatives, and securities.

A key question often arises: Do these financial transactions qualify as “supply” under GST?
To answer this, we must look at the definitions under the Central Goods and Services Tax Act (CGST Act) and Securities Contracts (Regulation) Act, 1956 (SCRA).

GST on Banking, Financial Instruments, and Securities: Complete Guide

Money and GST Treatment

As per Section 2(75) of the CGST Act, ‘money’ includes:

• Instruments like cheques, drafts, pay orders, promissory notes, letters of credit, etc.
• Transactions in Commercial Paper (CP) and Certificate of Deposit (CD), which are in the nature of promissory notes.

Therefore, pure transactions in money are excluded from the definition of goods and services and hence are outside GST.

However, where a separate consideration is charged (e.g., draft issuance charges, LC charges, documentation fees), such services are liable to GST if other elements of taxability are present.

Securities under GST Law

The term ‘securities’ shall have the same meaning as assigned in Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA) [Section 2(101), CGST Act].

As per Section 2(h) of SCRA, “securities” include:

• Shares, scrips, stocks, bonds, debentures, debenture stock
• Derivative [Section 2(h)(ia), SCRA]
• Units of mutual funds or collective investment schemes
• Security receipts [as per SARFAESI Act, 2002]
• Government securities
• Any other instruments declared by the Central Government
• Rights or interest in securities

Since securities are neither goods nor services, transactions in securities are outside the scope of GST.

Derivatives and GST Applicability

As per Section 2(ac) of SCRA, “derivative” includes:
(A) a security derived from a debt instrument, share, loan, risk instrument, or contract for differences;
(B) a contract deriving its value from prices or indices of underlying securities.

Thus, derivatives fall under securities and hence are not liable to GST.

Examples: Futures and Forward Contracts

• Futures Contracts: Standardised contracts traded on exchanges, marked-to-market daily.
• Forward Contracts: Customised OTC (over-the-counter) contracts between two parties.

GST Treatment:

• If settled by net difference → falls under securities → No GST.
• If settled by actual delivery of goods/commodities/currency → treated as normal supply of goods → GST applicable.

Loans, Deposits, and Advances – Section Reference

As per Entry 27 of Notification No. 12/2017-Central Tax (Rate), services by way of extending deposits, loans, or advances are exempt from GST, provided the consideration is represented by way of interest or discount.

However, any processing fees, documentation charges, or service charges related to loans are taxable under GST.

Securities Lending Scheme (SLS) and GST

The Securities Lending Scheme, 1997 (SLS) prescribed by SEBI allows lending and borrowing of securities.

• Lender: Deposits securities with an approved intermediary.
• Borrower: Borrows securities temporarily for a fee.
• Approved intermediary: Registered entity facilitating the process.

GST Implication:

• As seen earlier, disposal of securities is not supply.
• But lending of securities under SLS is not disposal; hence it is treated as a service.
• Therefore, fees charged by lenders or intermediaries are subject to GST.

Reference: Circular No. 119/38/2019-GST dated 11.10.2019.

Service Charges Taxable under GST in Financial Sector

Even though money and securities are excluded from GST, the following service-related charges are taxable:

• Draft issuance charges
• Letter of Credit (LC) charges
• Brokerage/commission on securities transactions
• Documentation charges
• Service fees on derivatives contracts

Conclusion

The GST law clearly excludes money and securities from the scope of supply. However, ancillary services and charges are taxable.

• Transactions in money → Not supply.
• Securities & derivatives → Excluded from GST unless settled with delivery.
• Loan/Deposit interest → Exempt, but processing/service fees → Taxable.
• Securities Lending Scheme → Lending fee and intermediary charges taxable.

Thus, while financial instruments themselves escape GST, the service ecosystem around them attracts GST liability.

Frequently Asked Questions (FAQs) on GST and Financial Services

1. Is GST applicable on securities?

No. As per Section 2(101) of the CGST Act, securities are defined with reference to Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA). Since securities are neither goods nor services, transactions in securities are not liable to GST.

2. Are derivatives taxable under GST?

No. Derivatives are included in the definition of securities under Section 2(h) of the SCRA. Therefore, they are not subject to GST, unless there is an actual delivery of the underlying asset, in which case GST applies as supply of goods.

3. Is GST applicable on futures and forward contracts?

• Futures/Forward contracts settled by price difference (net settlement) → Not taxable under GST (treated as securities).
• Contracts settled by actual delivery of goods/commodities → Taxable under GST as supply of goods.

4. Are Commercial Paper (CP) and Certificates of Deposit (CD) covered under GST?

No. CPs and CDs are considered as money market instruments in the nature of promissory notes. Since transactions in money are excluded from GST, CPs and CDs are outside GST.

5. Is GST charged on loan interest?

No. Services by way of extending deposits, loans, or advances, where the consideration is represented by way of interest or discount, are exempt from GST under Notification No. 12/2017-Central Tax (Rate).

6. What charges in banking and financial services are subject to GST?

GST is applicable on:

• Loan processing fees
• Documentation charges
• Draft issuance charges
• Letter of Credit (LC) charges
• Brokerage or commission on securities
• Service charges on derivatives

7. What is the GST treatment of the Securities Lending Scheme (SLS)?

Under the Securities Lending Scheme, 1997 (SLS) prescribed by SEBI, securities lending itself is not considered disposal of securities. However, lending fees and intermediary charges are taxable under GST, as clarified in Circular No. 119/38/2019-GST dated 11.10.2019.