Foreign lenders are urging government intervention to exempt custodian services from the Goods and Services Tax (GST), according to sources familiar with the matter. Custodian services, provided to overseas institutional and portfolio investors, are at the center of this request.

Last month, lenders submitted a representation to the finance ministry, asserting that these services are akin to exports and should be exempt from GST. The issue arose during the GST audit of certain foreign banks, and lenders fear receiving tax demand notices dating back to 2017 when the new indirect tax regime was implemented. As of March 2023, the Assets Under Custody (AUC) amount to Rs 48.7 lakh crore, down from Rs 50.94 lakh crore in March 2022.

Custodian banks in India offer services such as settlement, safekeeping, and reporting of customers' cash and marketable securities, catering to both offshore and onshore activities.

Bank executives have raised the matter with relevant government authorities, emphasizing the need for clarity to avoid litigation and fund blockages. They argue that the services should be treated as exports for taxation purposes, emphasising that foreign portfolio investors (FPIs) have no business establishment in India, making the place of supply outside the country.

While some government views suggest treating custodian services as performance-based, subject to an 18 per cent tax rate on revenues, experts and industry reports highlight the need for clarification to prevent potential litigation in a market that represents less than 2 per cent of the global custody services market. Major clients for these services include mutual funds, foreign investors, and insurance companies.