Place of Supply for Custodial Services Provided by Banks to FPIs.

Introduction

The Central Board of Indirect Taxes and Customs (CBIC) has issued Circular No. 220/14/2024-GST to provide clarity on the place of supply for custodial services provided by banks to Foreign Portfolio Investors (FPIs). Place of supply of services provided by a banking company to account holders is the location of the supplier.

Background

The CBIC received representations seeking clarification on the place of supply for custodial services provided by banks to FPIs. Some field formations held the view that Section 13(8)(a) of the Integrated Goods and Services Tax Act, 2017 (IGST Act), which specifies the location of the service provider, should determine the place of supply for these services.

Key Clarifications

1. Definition of Custodial Services:
   • Custodial services, as per the Securities and Exchange Board of India (Custodian of Securities) Regulations 1996, include:
     • Safekeeping of securities.
     • Maintaining accounts of securities.
     • Collecting benefits or rights accruing to the client.
     • Keeping the client informed about actions affecting their securities.
     • Maintaining and reconciling records.
2. FPIs and Their Investments:
   • Regulation 20(1) of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, allows FPIs to invest in various securities such as shares, debentures, units of mutual funds, derivatives, real estate investment trusts, and other instruments that the Reserve Bank of India permits.
3. Custodial Agreements:
   • Banks enter into custodial agreements with FPIs for providing custodial services, primarily involving the maintenance of securities accounts.
4. Place of Supply Under IGST Act:
   • As per Section 13(8)(a) of the IGST Act, the place of supply of services provided by a banking company to account holders is the location of the supplier.
   • Explanation (a) of Section 13(8) defines ‘account’ as an account bearing interest to the depositor. Including non-resident external and non-resident ordinary accounts.
5. Clarifications from Service Tax Regime:
   • Similar provisions existed under the Service Tax regime. The Education Guide clarified that custodial services are not considered services provided to account holders.
   • Rule 9(a) of the Service Tax Place of Provision of Supply Rules, 2012, similar to Section 13(8)(a) of the IGST Act, determined the place of provision of custodial services under Service Tax.
6. Current Clarification Under GST:
   • Banks do not treat the custodial services they provide to FPIs as services provided to account holders.
   • Therefore, the place of supply for these services is not determined under Section 13(8)(a) but under the default provision, sub-section (2) of Section 13 of the IGST Act.

Conclusion

This circular ensures that the place of supply for custodial services provided to FPIs is determined correctly, aligning with the default provision under Section 13(2) of the IGST Act, rather than treating them as services to account holders. This clarification helps maintain consistency and uniformity in the application of GST laws.

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