goods and service tax

Is the Reserve Bank of India a Banking Company Under CGST?

Introduction

This article examines whether the Reserve Bank of India (RBI) qualifies as a banking company under Section 17(4) of the CGST Act, 2017, which entails a 50% restriction on Input Tax Credit (ITC). We will approach the discussion methodically, focusing on the following key areas:

  1. Understanding Section 17(4) of the CGST Act and its implications for banking companies.
  2. Definitions and interpretations of “banking company” from the CGST Act, IGST Act, RBI Act, and the Banking Regulation Act.
  3. A thorough analysis of the RBI’s business activities, drawing insights from Section 17 of the RBI Act.
  4. Contrasting the RBI with commercial banking institutions to elucidate their differences.
  5. A conclusive evaluation of whether the RBI is subject to the restrictions outlined in Section 17(4) of the CGST Act.

Understanding Section 17(4) of the CGST Act

Section 17(4) specifies:

“A banking company or a financial institution, including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans, or advances shall have the option to either comply with the provisions of subsection (2) or avail, every month, an amount equal to fifty percent of the eligible input tax credit on inputs, capital goods, and input services in that month, with the rest lapsing.”

Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year. Provided further that the restriction of fifty percent shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.”

In this analysis, we will first explore the legal definitions of a ‘banking company’ in various statutes, including the CGST Act, IGST Act, RBI Act, and the Banking Regulation Act. We will then evaluate whether the RBI meets the criteria for a banking company based on these definitions and its actual business operations. This will include a closer look at the RBI’s roles and functions in the financial ecosystem, comparing its activities to those of commercial banks. We will conclude by assessing the applicability of the 50% ITC restriction under Section 17(4) of the CGST Act to the RBI.

Analysis of the Term “Banking Company”

1. Absence of Definition in the CGST Act

The term ‘banking company’ is not defined in Section 2 or Section 17 of the CGST Act.

2. Definition under the IGST Act, 2017

Section 13(8) of the IGST Act states: “Banking company” shall have the same meaning as assigned to it under clause (a) of Section 45A of the Reserve Bank of India Act, 1934 (2 of 1934). While Section 17 of the CGST Act does not explicitly recognize this definition, it may still be relevant.

3. Definition under the Reserve Bank of India Act, 1934

According to Section 45A of the RBI Act, a banking company is defined as: “A banking company as defined in Section 5 of the Banking Regulation Act, 1949, and includes the State Bank of India, any subsidiary bank under the State Bank of India (Subsidiary Banks) Act, 1959, any corresponding new bank constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and any other financial institution notified by the Central Government.”

4. Definition under the Banking Regulation Act, 1949

Section 5(c) of the Banking Regulation Act delineates a banking company as: “Any company that transacts the business of banking in India.” In further clarification, Section 5(b) defines ‘banking’ as: “The accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order, or otherwise.”

Does RBI Qualify as a Banking Company?

5. RBI’s Permitted Business Activities (Section 17 of the RBI Act)

Section 17 of the RBI Act states: “The Bank shall be authorized to accept money on deposit without interest from, and collect money for, the Central Government, the State Government, local authorities, banks, and any other persons.”

6. Scope of “Any Other Persons” Under Section 17(1)

This terminology does not extend to the general public but pertains to recognized financial entities, statutory bodies, and government institutions. The RBI does not accept deposits from the general public for lending or investment, which is critical for classification as a banking company.

7. Distinguishing RBI from Banking Companies

  • Regulatory Role: The RBI serves as India’s central bank, focusing on monetary policy, financial stability, and bank supervision rather than engaging in commercial banking activities.
  • No Public Transactions: Unlike commercial banks, the RBI does not offer cheque books, ATM services, or facilitate public withdrawals.

Conclusion

Based on the legal frameworks and RBI's operational scope, the findings suggest that:

  • The RBI does not conform to the definition of a banking company as outlined in the Banking Regulation Act, RBI Act, or CGST Act.
  • Since the RBI does not accept public deposits for lending or investment purposes, it falls outside the scope of Section 17(4) of the CGST Act.

Consequently, the RBI is not subject to the 50% ITC restriction that applies to banking companies and financial institutions under the CGST/SGST Acts.