Service tax on Banking and other financial services was imposed w.e.f.16-07-2001. After going through many changes, expansion in scope, clubbing of some services, modification to the definition of service providers etc. the present coverage of this service , with abatement, exemption, clarification etc. reads as under:
A) Banking and other financial services provided to any person,
1) By a banking company or
2) By a financial institution or
3) By a non-banking financial company or
4) By any other body corporate or
5) By commercial concern.
in relation to banking and other financial services are taxable to service tax under section 65(102)clause (zm) of the Finance Act 1994. Service tax is not a tax on the above entities but a tax on the services provided by these entities in relation to banking and other financial services. It is therefore necessary to know what these entities mean.
1) Banking Company
Banking company means a company which transacts in India, the business of accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise. However any industrial or trading company which accepts deposits of money from the public merely for the purpose of financing its business is not treated as a banking company.
2) Financial Institution
Financial institution” means any non-banking institution which carries on as its business, the financing of any activity, dealing in marketable securities, business of hire-purchase, insurance business, chits or kuries business , disbursing monies but does not engage in agricultural operations or industrial activity or purchase or sale of any goods or the providing of any services or financing of trade of immovable property.
3) Non-banking financial company
Non-banking financial company means a financial institution which is a company or a non-banking institution which is a company and which has as its principal business the receiving of deposits or lending in any manner.
4) Body corporate
A body corporate is a body incorporated under some statute and which has a perpetual succession, a common seal and is a legal entity apart from the members constituting it. It includes a company incorporated outside India but does not include a corporation sole and a co-operative society registered under any law relating to co-operative societies.
5) Commercial concern
Commercial concern is not defined by the ACT. But generally interpreted commercial means something that serves the interest of profit or other market advantage. It may imply an individual operating business activities on a large scale as against the one operating for his own livelihood. It may be construed as a concern or organization engaged or connected in providing services with a motive of making profit. However the real intention of the parties and the circumstances concerning the formation of the contract and how the parties have acted on the market may be an eventual guidance to determine the existence of a commercial concern.
6) What are not commercial concerns
a) Government department
b) Post Office
c) Banking company or a financial institution, while providing service in relation to collection of duties or taxes levied by Government.
d) Co-operative banks are also taxable as a commercial concern but not as a banking company.
B. Services which are taxable under Banking and other financial services
1) Financial leasing services including equipment leasing and hire-purchase;
Financial leasing is a way to purchase an asset with the aid of loan and the lessee uses the asset. It is a contract for leasing of a specific asset between two parties for its use and occupation, lease payments covering full cost of asset together with interest and lessee being entitled to own or having option to own the asset at the end of lease period after completing lease payment.
Hire purchase transaction is a method of sales by which goods are let out on hire to the purchaser on payment on an agreed sum of amount on periodical instalments. The ownership of the property remains under the control of the creditor who normally passes the right to hirer on the condition of payment of the last agreed sum of money in instalment.
|Amount exempt||Amount taxable|
|90% of the lease rent forming or representing as interest.||a) Lease management fees
b) Processing fees
c) Documentation charges
d) Administrative fees.
2) Merchant banking services;
The merchant bankers are those who normally mobilize funds from the financial market for use by their clients. Their presence in the market has brought many new and innovative financial products structuring of banking and insurance instruments with value creation. They are engaged in a continuous redefinition , reinvention and reconfiguration of financial products on a persistent basis. They have shifted Market focus from mass banking products to class banking with introduction of value added products . Some of their activities generally include:
|1.||Management of customers securities||2.||Portfolio management|
|3.||Appraisal, counselling , management of projects||4.||Underwriting of shares and debentures|
|5.||Circumvention of the syndication of loans||6.||Management of payment of interest and dividend etc|
3) Securities and foreign exchange broking, and purchase or sale of foreign currency, including money changing
Forex or Foreign Exchange is all about exchange of currencies of one country to the others’. It is about investing money in foreign currencies to gain profit by selling it at a higher price. Because of the recent development of efficient online platforms and communication technology, individual traders can trade or invest in Forex. Forex brokers, conventional and online, work as the useful link between the investor and the market by providing a secure online trading gateway either in exchange of a small subscription or a percentage of commission. These days the forex brokers offer their services through mobile networks which is a beautiful combination of portability and functionality.
4) Asset management , portfolio management, fund management, pension fund management, custodial, depository and trust services, cash management services.
a) Asset management refers to the professional management of investments such as stocks and bonds, along with real estate. Assessment management entities work to ensure that the assets of the investors grow as per the planned goals and investment styles. The asset management team decides how to distribute assets, and may move money from one location to another to take advantage of a strong market. The team also provides long term investing advice based on market projections, and may assist the investor with purchasing real estate and general wealth management.
b) Portfolio Management
Portfolio management (including stock market portfolio)is concerned with resource allocation to achieve corporate new product objectives. Portfolio management for new products is a dynamic decision process wherein new projects are evaluated, selected, and prioritized. The activities of portfolio management may be summarised as under:-
|1.||Maximize the return on your product innovation investments||2.||Maintain competitive position|
|3.||Achieve efficient and effective allocation of scarce resources||4.||Forge a link between project selection and business strategy|
|5.||Achieve focus||6.||Communicate priorities|
|7.||Achieve balance||8.||Enable objective project selection|
c) Fund including pension fund management
The objects of portfolio management and fund management almost overlap. Fund Management (also known as Investment management) is the professional management of various securities (shares, bonds and other securities) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchange-traded funds) .
|1.||Financial statement analysis||2.||Asset selection|
|3.||Stock selection||4.||Research of individual assets and asset classes|
|5.||Dealing, settlement, marketing, internal auditing, preparation of reports||6.||Implementation and ongoing monitoring of investments.|
d) Custodial, depository and trust services
- Custodial services: means services offered by an organization, usually a bank or any other approved institutions, that hold the securities and other assets of mutual funds and other institutional investors. These services also include keeping custody of the securities and funds of their clients, and settle their financial market transactions with the exchanges. The custodians effectively employ technology and efficiently process huge volumes of transactions. With the growth of the investment industry particularly in the mutual fund arena, the level of assets under custody has increased significantly. The persons seeking custodial services include mutual funds and investment managers, retirement plans, bank fiduciary and agency accounts, bank marketable securities accounts, insurance companies, corporations, endowments and foundations, and private banking clients.
- Depository services: Depository is system of organisation, which keeps records of securities, deposited by its depositors. The records may be physical or simply electronic records. Depository Participant is an agent of the depository through which it interfaces with the investor. A DP can offer depository services only after it gets proper registration from SEB.A depository is an institution or a kind of organization which holds securities with it, in which trading is done among shares, debentures, mutual funds, derivatives, F&O and commodities. The intermediatories perform its actions in various kinds of securities at Depository on the behalf of its clients. These intermediatories are called Dipositories Participants. The services provided by depositories are:
|1.||Dematerialisation (usually known as demat) of physical certificates to electronic form||2.||Rematerialisation, known as remat, is reverse of demat, i.e. getting physical certificates from the electronic securities Transfer of securities|
|3.||Change of beneficial ownership including beneficial ownership.||4.||Transfer of securities|
|5.||Settlement of trades done on exchange connected to the Depository etc.|
There are basically two kinds of depositories in India. One is the National Securities Depository Limited(NSDL) and the other is the Central Depository Service Limited(CDSL).
- Trust services: A Trustee is a legal custodian who looks after all the monies invested in a unit trust or mutual fund. As per SEBI Debenture Trustee rules, trust deed is a deed executed by the body corporate in favour of the trustees named therein for the benefit of the debenture holders. The trustee administers financial assets on behalf of another. The assets are typically held in the form of a trust, a legal instrument that spells out the beneficiaries and what the money can be spent for .Trust services are rendered by Trust companies and generally include
|1.||To act as fiscal agents for corporations||2.||Attending to the registration and transfer of stocks and bonds|
|3.||Serving as a trustee for bond and mortgage creditors||4.||Transacting general banking and loan business|
|5.||Investment management||6.||Investment strategy and portfolio management|
|7.||Management of real estate||7.||Escrow service and safekeeping of valuables|
e) Cash Management services:
|1.||Collection of receivables||2.||Execution of payment|
|3.||Management of liquidity||4.||Providing customized Management Information System (MIS) reports|
|5.||Web based internet banking||6.||Armored car services|
|7.||Lockbox services for dropping cheques||8.||Sweep account services for sweeping cash between saving & fixed deposit account|
|9.||Wire transfer of funds|
Reserve Bank of India has clarified that the business of a chit fund is to mobilize cash from the subscribers and effectively cause movement of such cash to keep it working and, therefore, the activity of chit funds is in the nature of cash management.
Simple Chit Funds : In this case, members agree to contribute to the fund a certain amount at regular interval. Lots are drawn periodically and the member, whose name appears, gets the periodical collection. No separate amount is charged from the members. In the case of Simple Chit Funds, no consideration is paid or received for the services provided and, therefore, the question of levy of service tax does not arise.
Business Chit Funds : In this case, there is a promoter known as foreman who draws up the terms and conditions of the scheme and enrolls subscribers. Every subscriber has to pay his subscription in regular installments. The foreman charges a separate amount for the services provided. Some States prescribe a ceiling limit for the amount to be charged by such promoter for the services provided. Commission amount is retained by the promoter as consideration for providing the services in relation to chit fund. In the case of Business Chit Funds, cash management service is provided for a consideration and, therefore, leviable to service tax under “banking and other financial services
However an abatement of 30% of the value of prize amount is allowed while calculating the service tax.
5) Advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;
6) Provision and transfer of information and data processing; and
7) Banker to an issue services: means a scheduled bank carrying on all or any of the issue related activities namely acceptance of application and application monies; acceptance of allotment or call monies; refund of application monies; and payment of dividend or interest warrants.
8) Other financial services, namely
|1.||Lending||2.||Issue of pay order, demand draft, cheque, letter of credit and bill exchange||3.||Transfer of money including telegraphic transfer, mail transfer and electronic transfer|
|4.||Providing bank guarantee, overdraft facility, bill discounting facility,||5.||Safe deposit locker, safe vaults;||6.||Operation of bank accounts|
|7.||Foreign exchange broking||8.||Collection of bills and other receivables||9.||Payment of invoices on behalf of the clients|
|10.||Pooling of funds from various centres||11.||Distribution of funds for credit of the accounts of beneficiaries at various centres.||12.||Centralized Collection and Payment accounting solution etc|
|13.||Maintenance of accounts of CMS clients||14.||Providing assistance to various banks for collection of instruments|
9) Foreign exchange broking and purchase or sale of foreign currency, including money changing provided by a foreign exchange broker or an authorised dealer in foreign exchange or an authorised money changer, other than those covered above. Foreign Exchange Broker Service is leviable to service tax. Foreign exchange brokers provide services as an intermediary in relation to purchase or sale of foreign currency on a commission/brokerage basis. Purchase or sale of foreign currency is undertaken by foreign exchange broker and also by persons authorised under Foreign Exchange Management Act, 1999 to deal in foreign exchange and having licence issued by RBI. Such authorised persons are known as money changers or authorised dealers of foreign exchange. Services in relation to purchase or sale of foreign currency provided by foreign exchange broker, money changer and authorised dealer of foreign exchange are taxable under this head of service tax. Foreign exchange broker indicates the consideration for the services provided (commission) explicitly. Whereas money changers/authorised dealers of foreign exchange providing same services may not necessarily indicate the consideration explicitly.
To enable determination of taxable value, where the consideration for the services provided in relation to purchase or sale of foreign currency is not explicitly indicated by the service provider, a method under rule 6(7B) of the Service Tax Rules, 1994 has been prescribed. As per this provision, the service provider has the option to pay service tax calculated at the rate of 0.25% of the gross amount of currency exchanged. Provided that such option shall not be available in cases where the consideration for the service provided or to be provided is shown separately in the invoice, bill or, as the case may be, challan issued by the service provider
|Buying rate : US$ 1 = Rs. 38 // Selling rate : US$ 1 = Rs. 40|
|(i)?Purchase of US$ 100 by the service provider :|
|Gross amount of currency exchanged in rupees||=||Rs. 3800 (Rs. 38 x 100)|
|Service tax payable||=||Rs. 9.5 (0.25% x 3800)|
|(ii)?Sale of US$ 100 by the service provider :|
|Gross amount of currency exchanged in rupees||=||Rs. 4000 (Rs. 40 x 100)|
|Service tax payable||=||Rs. 10 (0.25% x 4000)|
10) Some specific issues, exemptions etc.
a) In case of mutual , fund Entry and Exit load charges are not towards fund management service provided by the AMC but to meet the initial issue expense and other specified expenses, incurred by the mutual fund. It is accordingly clarified that “entry and exit load” charged by mutual fund would not attract service tax levy under the category of fund management service.
b) There is no exemption from service tax to Central/State Government Organisations and the Public sector undertakings rendering the specified taxable service.
c) If a Government Department (sovereign)/public authorities performs any mandatory or statutory function under the provisions of any law and collect any fees, or taxes levied by the Government of India or the Government of a State, such services are exempted from the payment of service tax as such activity shall be treated as activity purely in public interest and will not be taxable. If such authority performs a service, which is not in the nature of statutory activity, for a consideration, the same shall be taxable.
d) Services provided by Department of Posts
|Exempt Services||Taxable Services|
|a) Basic mail services known as postal services such as post card, inland letter, book post, registered post provided exclusively by the Department of Posts to meet the universal postal obligations.b) Transfer of money through money orders, operation of savings accounts, issue of postal orders, pension payments and other such services||Courier services (Speed Post), insurance services (Postal Life Insurance), agency or intermediary services on commission basis (distribution of mutual funds, bonds, passport applications, collection of telephone and electricity bills), which are also provided by other commercial organizations. Such services are liable to service tax under appropriate taxable services.|
e) Pre-closure charges cannot be considered to be interest on loans given and the same is on account of closure of a case of loan paid in advance of scheduled date of repayment and hence service tax is applicable.
f) Cenvat Credit in respect of input services in relation to banking and financial services are fully available (i.e. @100%) even if the some of the output services are exempt and some taxable.
g) Service tax on interest on
(a) Overdraft facility;
(b) Cash Credit facility; or
(c) Discounting of bills, bills of exchange or cheques,
Is exempt from service tax, subject to the condition that the said interest amount is shown separately in an invoice, a bill or, as the case may be, a challan issued for this purpose
h) The ‘interest on loans’ has been specifically excluded from the purview of service tax and there all such interests that are in the nature of interests on loans would thus remain excluded from taxable value.
i) Exemption from service tax has been provided to financial leasing services including equipment leasing and hire-purchase, both for principal and interest portion of the installments paid. The amount of interest is calculated as 90% of the difference between the installment paid towards the payment of the lease amount and the principal amount in such installment.
j) The following taxable services, provided to any person, by Reserve Bank of India, are exempt from the whole of service tax leviable thereon under section 66 of the Finance Act.
1) Taxable services provided or to be provided to any person, by the Reserve Bank of India;
2) Taxable services provided by any person, to the Reserve bank of India when the service tax for such services is liable to be paid by the Reserve Bank of India under sub-section (2) of section 68 of the said Finance Act read with rule 2 of the Service Tax rules, 1994;
3) Taxable services received in India from outside India by the Reserve Bank of India under section 66A of the Finance Act, 1994.”
k) Banking and financial services received by an exporter and used for export of goods, the service tax paid by an exporter on these services is refunded to the exporter on compliance of conditions mentioned in that notification.
CA LALIT MUNOYAT
B.Com.(Hons.), CS, FCA, DISA