SERVICE TAX ON BANKING SERVICES

[Dr. Sanjiv Agarwal]

Banking and financial services are subject to levy of Service Tax in more than one form. While only specific services were taxed prior to 1.7.2012, all such services are taxable now barring those which are in negative list.

W.e.f.1.07.2012, all services, other than services specified in the negative list, provided or agreed to be provided in the taxable territory by a person to another would be taxed under section 66B. Service' has been defined in clause (44) of the new section 65B and means -

• any activity
• for consideration
• carried out by a person for another
• and includes a declared service.

In short, service means -

• any activity
• carried out by a person for another
• for consideration includes declared service but does not include

• transfer in title of goods or immovable property
• transaction in money or actionable claim
• provisions of service by employee to employer
• deemed sale of goods
• duties performed by MP/MLA/Members of Municipal Corporation, Panchayats or Local authorities person holding constitutional posts.

Since all banking companies including cooperative banks satisfy all the conditions of 'service', their services shall be taxable, subject to provisions of the Service Tax law.

Negative List of Services

Meaning of Negative List (Clause 34 of Section 65B/Section 66D)

Negative list has been defined under clause 34 of section 65B and such services are specified in section 66D of the Finance Act, 1994, as introduced by the Finance Act, 2012. Negative list of services would mean the services specified in section 66D which specifies seventeen broad categories of services. Only the following negative list entry is relevant for bank -

1. extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;
2. inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers.

Interest

Interest has been defined in section 65B(30) of the Finance Act, 1994 as under-

‘interest’ means interest payable in any manner in respect of any money borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.

It should only be in the form of interest and does not include any service charge, fee or other charge, by whatever name called. For example, processing charges, pre-payment fee, late fee, cheque bounce charges etc. will not be called interest.

Such ‘interest’ has to be paid or received in relation to -

• Money borrowed
• Debt incurred
• Deposit
• Claim or other similar right or obligation

Any charges or amounts collected over and above the interest or discount amounts would represent taxable consideration. Invoice discounting or cheque discounting or any similar form of discounting is covered only to the extent consideration is represented by way of discount as such discounting is nothing else but a manner of extending a credit facility or a loan.

The negative list entry covers any such service wherein moneys due are allowed to be used or retained on payment of interest or on a discount. The words used are ‘deposits, loans or advances and have to be taken in the generic sense. They would cover any facility by which an amount of money is lent or allowed to be used or retained on payment of what is commonly called the time value of money which could be in the form of an interest or a discount. This entry would not cover investments by way of equity or any other manner where the investor is entitled to a share of profit.

Illustrations of services covered in negative list could be as follows -

• Fixed deposits or saving deposits or any other such deposits in a bank for which return is received by way of interest.
• Providing a loan or over draft facility or a credit limit facility in consideration for payment of interest.
• Mortgages or loans with a collateral security to the extent that the consideration for advancing such loans or advances are represented by way of interest.
• Corporate deposits to the extent that the consideration for advancing such loans or advances are represented by way of interest or discount.

Repos / Reverse Repos

Repos and reverse repos are financial instruments of short term call money market that are normally used by banks to borrow from or lend money to RBI. The margins, called the repo rate or reverse repo rate in such transactions are nothing but interest charged for lending or borrowing of money. Thus, they have the characteristics of loans and deposits for interest. However, they are more appropriately excluded from the definition of service itself being the sale and purchase of securities, which are goods.

Commercial Paper (‘CP’) and Certificate of Deposit (‘CD’)

Commercial paper (‘CP’) and Certificate of Deposit (‘CD’) are instruments for lending or borrowing money where in consideration is represented by way of a discount issue or subscription to CPs or CDs would be covered in the negative list entry relating to ‘services by way of extending deposits, loans or advances insofar as consideration is represented by way of interest or discount’. It may also be borne in mind that promissory note is included in the definition of money in the Act as given in clause (33) of section 65B.

However, if some service charges or service fees or documentation fees or broking charges or such like fees or charges are charged, the same would be considerations for provision of service and chargeable to service tax.

Credit Cards

In case of a credit card, issuing entity allows the facility of payment of the purchases made by the card holder within a specified period failing which some charges are levied. The question that arises is whether the credit so extended for this payment is in the nature of a loan or advance for interest.

Interest for delayed payment of any consideration for the sale of goods or provision of service has been specifically excluded from value by rule 6 of valuation rules. Thus ordinarily any interest charged for delayed payment of consideration would be outside the gambit of service tax. However in the case of credit cards the credit extended is not for the delayed payment of consideration for the provision of services. The services in the case of the credit card are by way of levy of issuing charges or the commission charged from merchants etc. The interest in this case is not for the consideration for the use of the card. Thus the benefit under the valuation rules will not be available to credit card companies.

The other question is whether such credit extended will amount to loans or advances. Loans and advances are meant to signify amounts contractually negotiated as such (loan or advance) and not merely failure to pay an amount at the due date. The exorbitant charges have also no relationship with the prevailing interest for the same class of creditworthiness and are in the nature of consideration for the services rendered for using the convenience of using the services by way of a credit card and hence taxable.

Exempted Services

Apart from services mentioned under negative list, there are specific exemptions under Notification No. 25/2012-ST dated 20.06.2012. However, no specific exemption relating to banks / banking services are covered under the said mega exemption notification.