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.

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 –

(n)   Services by way of—

(i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;

(ii) 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.

Exempted Services

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

Table showing Taxability of Income, Liability under Reverse Charge Mechanism (RCM) and Cenvat Credit Eligibility

Particulars Income / Expenses Taxability / RCM / Cenvat Credit Service Tax to be Deposited by
Interest Received Income Non- taxable
Discount Income Non- taxable
Commission on Pay Order / Demand Draft / LC etc. Income Taxable Bank
Commission from specified business other than banking business (Insurance, Mutual Fund etc.) Income Taxable Service Receiver
Foreign Exchange Commission Income Taxable Bank
Charges on non-maintaining minimum balance in account Income Taxable Bank
Subsidies Income Non- taxable
Profit from sale of / dealing with non-banking assets Income Non-taxable

 

 

Locker’s rent Income Taxable Bank
Income on card business Income Taxable Bank
ATM charges Income Taxable Bank
Loan processing charges Income Taxable Bank
Commission received on Bank Guarantee (BG)/ Letter of Credit (LC) Income Taxable Bank
Charges for making Demand Draft (DD) / Payment Order (PO) Income Taxable Bank
Handling charges Income Taxable Bank
Interest on late payment of Installment Income Non- taxable
Charges for issuance of cheque book Income Taxable Bank
Renting of immovable property Income Taxable Bank
Directors sitting fees Expenses Cenvatable / under RCM Bank
Members fee Expenses Cenvatable
Rent, taxes, insurance and lighting expenses Expenses Cenvatable
Security Expenses Expenses Cenvatable
Law charges Expenses Cenvatable / under RCM Bank
Postage and Telegram Expenses Expenses Cenvatable
Telephone charges Expenses Cenvatable
Auditor’s fees Expenses Cenvatable
Repair and maintenance of premises / ATM machines Expenses Cenvatable
Revenue Stamps Expenses
Sweeping and cleaning charges Expenses
Loss from sale of or dealing with non-banking assets Expenses Cenvatable
Advertisement Expenses Cenvatable
Recovery Agent fees / commission Expenses Cenvatable / under RCM Bank

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Category : Service Tax (3367)
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Tags : Dr Sanjiv Agarwal (244)

7 responses to “Service Tax on Banking and Financial Services – An analysis”

  1. Sumanta nayak says:

    Service tax on minimum balance charges .minimum balance charge is a type of penalty why service tax there on??

  2. Garima Sancheti says:

    Sir,
    our company is engaged in cold storage business, we are providing financing services to our customers @ 18% which includes 12% interest and 6% service charges. How much is taxable under Service tax and why?
    Reply asap.

  3. Balaji says:

    When a cheque when presented and processed for clearing, if the amount is insufficient, the penalty levied by the bank is justified, but is it a service liable for taxation by the Govt? In that case, the same service is provided by the bank even in case of sufficient funds, for which the clearing as a service is not taxed. Its still not conceivable how the bank’s justified earning as a PENALTY comes under the ambit of taxable service. Other earnings like DD issuance charges are services, for which tax seems justified, but tax on penalty? Tax needs to be merited, not thrusted. Kindly comment…

  4. Soumyaranjan says:

    Dear Mr. Rajiv,

    This is a good presentation.

    Please add views on interest subvention i.e. interest not given fully by the buyer but some portion given by seller.

    Thanks & regards,
    Soumyaranjan

  5. Sanjiv Agarwal says:

    Dear Mr Arvindhan,

    It will not be cenvatable. Thanks for pointing out. Making amends .

    Sanjiv Agarwal

  6. carampravesh says:

    Thank you for your good efforts sir….its really usefull…..

  7. P Aravindhan says:

    Sir
    how Loss from sale of or dealing with non-banking assets is cenvatable. Can you please give us an example

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