It was clarified that the custodial services provided by banks or financial institutions to FPIs are not to be treated as services provided to ‘account holder’ and therefore, the said services are not covered under Section 13(8)(a) of the IGST Act

The Central Board of Indirect Taxes and Customs ( CBIC ) issued clarification regarding the place of supply applicable for custodial services provided by banks to Foreign Portfolio Investors ( FIPs ). The Representation was made seeking clarification on the Place of Supply in cases of Custodial Services provided by Banks to Foreign Portfolio Investors ( FPIs ), as a view is being taken by some field formations that the Place of Supply in case of ‘custodial service’ would be determined as per Section 13(8)(a) of the Integrated Goods and Services Tax Act, 2017 ( “IGST Act”), i.e. the location of the service provider (banks or financial institutions). Whether the activity of providing Custodial Services by banks or financial institutions to FPIs will be treated as services provided to ‘account holder’ under Section 13(8)(a) of the IGST Act, 2017?

According to the Securities and Exchange Board of India ( Custodian of Securities ) Regulations 1996, ‘Custodial Services’ in relation to securities means safekeeping of securities of a client and providing services incidental thereto, and includes-

• maintaining accounts of securities of a client;
• collecting the benefits or rights accruing to the client in respect of securities;
• keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client; and
• maintaining and reconciling records of the services referred above.

As per Regulation 20(1) of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, an FPI is allowed to invest only in the following securities, namely-

(a)        shares, debentures and warrants issued by a body corporate;  listed or to be listed on a recognized stock exchange in India;

(b)       units of schemes launched by mutual funds under Chapter V, VI-A and VI-B of the Securities  and Exchange Board of India (Mutual Fund) Regulations, 1996;

(c)        units of schemes floated by a Collective Investment Scheme in accordance with the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999;

(d)       derivatives traded on a recognized stock exchange;

(e)        units of real estate investment trusts, infrastructure investment trusts and units of Category III Alternative Investment Funds   registered with the Board;  (f)        Indian Depository Receipts;

(g)        any debt securities or other instruments as permitted by the  Reserve Bank of India for foreign portfolio investors to invest in from time to time; and

(h) such other instruments as specified by the Board from time to time.

Various banks enter into custodial agreements with the Foreign Portfolio Investors ( FPIs ) for the provision of such custodial services. The main activity carried out by banks as a custodian in relation to custodial services is maintaining account of the securities held by the FPIs.  It was mentioned that the provisions similar to above provisions under IGST Act existed during the Service Tax regime. The place of provision of service under Service Tax was governed by the Service Tax Place of Provision of Supply Rules, 2012.  Provisions of Rule 9(a) of the Service Tax Place of Provision of Supply Rules, 2012 were identical to that of section 13(8)(a) of the IGST Act. In the case of any service which does not qualify as a service provided to an account holder, the place of provision will be determined under the default rule i.e. the Main Rule 3. Thus, it will be the location of the service receiver where it is known ( ascertainable in the ordinary course of business ), and the location of the service provider otherwise.”        As per clarification given in Education Guide under Service Tax Regime, the custodial services are not considered to be covered under the services provided by bank to account holders, but have been considered to be covered under the services which are not provided to account holder.   As the provisions of section 13(8)(a) of the IGST Act are similar to the provisions of Rule 9(a) of the Service Tax Place of Provision of Supply Rules, 2012, the clarification given in the Education Guide under Service Tax Regime is equally applicable under GST Regime.  It was  clarified that the custodial services provided by banks or financial institutions to FPIs are not to be treated as services provided to ‘account holder’ and therefore, the said services are not covered under Section 13(8)(a) of the IGST Act. Therefore, the place of supply of such services is not to be determined under Section 13(8)(a) of the IGST Act but has to be determined under the default provision i.e., sub-section (2) of section 13 of the IGST Act.