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 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
- 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.
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||–|
|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|
|Profit from sale of / dealing with non-banking assets||Income||Non-taxable||– |
|Income on card business||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|
|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|
|Rent, taxes, insurance and lighting expenses||Expenses||Cenvatable||–|
|Law charges||Expenses||Cenvatable / under RCM||Bank|
|Postage and Telegram Expenses||Expenses||Cenvatable||–|
|Repair and maintenance of premises / ATM machines||Expenses||Cenvatable||–|
|Sweeping and cleaning charges||Expenses||–||–|
|Loss from sale of or dealing with non-banking assets||Expenses||Cenvatable||–|
|Recovery Agent fees / commission||Expenses||Cenvatable / under RCM||Bank|