Section 65(105)(zm) of the Finance Act, 1994 – Banking and Other FinancIAL Services – Service tax on Commitment charges collected by Banks

Letter [F.No. 137/62/2011 – Service Tax], dated 21-10-2011

The C & A G of India has pointed out that Banks are recovering Commitment charges for keeping available the undisbursed balance of a loan commitment and they are in the nature of charges for services provided. In this regard attention is invited to the letter F. No. 345/6/2008-TRU, dated 11.6.2008 (Annexure) wherein it has been clarified that any amount collected by the service provider on account of lending is either interest or service charges. Pre-closure/fore-closure charges are not charges collected for delayed payment. These charges not being ‘interest’ are to be appropriately treated as consideration for the services provided and accordingly leviable to service tax under Section 65(105)(zm).

2. Applying the same principle it is clarified that commitment charges are not in the nature of interest. Rather, they are directly linked to the provision of service and therefore are to be included in the taxable value for payment of service tax.

3. It is requested that immediate action may please be taken to protect the Government Revenue on these lines.

ANNEXURE

Section 65(105)(zm) of the Finance Act, 1994 – Banking and Other Financial Services – Service tax ON pre-closure charges in relation to lEnding

Letter F.No. 345/6/2008-TRU, dated 11-6-2008

Commissioner (Service Tax), Chennai has brought to the notice of the Board that divergent practices are being followed in respect of levy of service tax on services provided by banks and other financial institutions on the amount collected as pre-closure/fore-closure charges in relation to lending.

2. Services provided by a banking company or a financial institution or any other body corporate or any commercial concern in relation to banking or other financial services is leviable to service tax under Section 65(105)(zm) of Finance Act, 1994. ‘Banking and other financial services’ defined under Section 65(12) include lending. Any amount collected by the service provider on account of lending is either interest or service charges. Pre-closure/fore-closure charges are not charges collected for delayed payment. These charges not being ‘interest’ are to be appropriately treated as consideration for the services provided and accordingly leviable to service tax under Section 65(105)(zm).

3. Field formation may be advised to take appropriate action. This is issued with the approval of Member (Budget).

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