Services provided by banks
The banking sector is not merely an agent who accepts deposits and lends money. They provide a host of other functions like paying cheques drawn on customers account, collecting cheques deposited on customers account, enabling payments to customers via telegraphic transfer, automated clearing house, electronic transfer, etc, providing locker facilities, following standing instructions of the customers, providing foreign currency related services, providing other services like credit card/debit card services, statement retrieval, issue of cheque books, demand drafts/PO issuance, etc etc. By providing the above services the banks earn their income in the nature of interest, commission, service charge, rental charge etc. It is very pertinent to know as to what attracts service tax and what does not.
The definition of Service Tax as defined in Section 65B (44) of the Finance Act states that “service means any activity carried out by one person to another for a consideration and includes Declared Services but shall not inclue (i)….(ii)…..(iii) a transaction in money or actionable claims.” Further the negative list provided in Section 66D specifically mentions certain services which are non-taxable, which are:
- Extending deposits, loans and advances, in so far as the considerations is represented by way of interest or discount.
- Inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange pr amongst banks and such dealers.
Hence as per the exclusions provided by the statute, all the income earned by the bank are subject to service tax except for income by way of interest or discount or sale or purchase of foreign currency amongst banks and financial institutions. Transaction in the nature of mere money are loans, deposits, repos, reverse repos, Commercial paper, Certificate of Deposits, Forward Contract in commodities and currencies, Future Contracts.
The Taxation Guide point 4.14.2 provides illustrations which are in the nature of interest or discount on deposits, loans and advances:
- Fixed deposits or saving deposits or any other such deposits in a bank or a financial institution for which return is received by way of interest.
- Providing a loan or overdraft 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.
Other services which are not taxable would include:
- Actionable claim i.e. claim of unsecured debts or beneficial interest in movable property, is not service
- Securitisation of debt or assignment of secured debt is mere transfer of title in goods or immovable property and hence that is also not service.
- Sale or purchase of securities, derivatives, mutual fund is not service – as securities are ‘goods’ and hence it is mere transfer of title in goods.
- Business Facilitators to Bank and Insurance Company in rural area are exempt from service tax.
Meaning of Interest:
Interest is defined in Section 65B(30) as ‘ interest means interest payable in any manner in respect of moneys borrowed or debt incurred (including deposit, claim or similar rights and obligations) but does not include any service fee or other charges in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.’
Rule 6(2) of the Service tax (Determination of Value Rules), 2006 specifically excludes interest on delayed payments from the value of taxable value.
Hence interest in any form even on delayed payments is exempt from tax. However service fee or charge in respect of money borrowed or debt incurred does not fall within the definition of interest and hence are under the gambit of service tax.
Exclusive for Banks and Financial Institutions
- Invoice/challan can be issued in 45 days instead of normal 30 days
- Invoice/challan need not be serially numbered and name and address of the service receiver may not be in the invoice/challan.
- Rule 6(3B) provides that Bank or Financial Institution or NBFC engaged in providing services by way of extending deposits, loans or advances is required to pay ‘amount’ equal to 50% of Cenvat Credit availed on inputs and input services. Thus if banks or Financial Institutions are not engaged in providing services by way of extending deposits, loans or advances, this provision is not applicable.
- Sale and purchase of foreign exchange between banks and financial institutions is exempt. In other cases value is difference between buying and selling rate and RBI Reference rate. Another option is payment on the basis of slab rates is precribed in Rule 6(7B) of the Service Tax Rules.
- Place of Provision in case of services provided by a banking company, or a financial institution, or a NBFC to account holders would be the location of the service provider, i.e. the bank.
Other services provided by the Financial Institutions:
- Hire Purchase and Financial Lease of goods: Activity in relation to delivery of goods on hire purchase or any system of payment by instalments is a declared service and service tax is payable on the management fees, processing fees. However taxability of service tax on interest component is doubtful as interest is exempt
- Hire and Operating Lease of goods: Transfer of goods by way of hiring. Leasing, licensing or any manner without right to use is a declared service. Hence if possession is not transferred, service tax is payable.
(Article written by Sweta Agarwal – Contact me at email@example.com)