All about service tax on banking services - Dr Sanjiv Agarwal

Volume X Part 4 February 25, 2015 12 Business Advisor

All about service tax on banking services

Dr Sanjiv Agarwal

Banking and financial services are subject to the 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

the negative list.

Taxable services in relation to banking services

(W.e.f. 1.09.2004 and Prior to 1.7.2012)

(i) Banking & other financial services [Section

65(12), 65(105)(zzk)]

Taxable services meant any service provided or to be provided to any

person, by a banking company or a financial institution including a non-

banking financial company, or any other body corporate or commercial

concern, in relation to banking and other financial services.

(ii) Foreign exchange broker [Section 65(46), 65(105)(zzk)]

Taxable services meant any service provided or to be provided to any

person, by a foreign exchange broker, including an authorised dealer in

foreign exchange or an authorised money changer, other than a banking

company or a financial institution including a non-banking financial

company or any other body corporate or commercial concern referred to in

sub-clause (zm).

(iii) Credit card, debit card, charge card or other payment card related

services [Section 65 (33a), 65(105)(zzzw)]

Taxable service meant any service provided or to be provided to any person,

by any other person, in relation to credit card, debit card, charge card or

other payment card service, in any manner.

Taxable services in relation to banking services (W.e.f. 1.7.2012)

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. Service has been defined in

clause (44) of the new section 65B and means -

any activity


for consideration

carried out by a person for another

and includes a declared service.

In short, service means —

• any activity

• carried out by a person for another

• for consideration includes declared service but does not include

transfer in title of goods or immovable property

transaction in money or actionable claim

provisions of service by employee to employer

deemed sale of goods

duties performed by MP/ MLA/ Members of Municipal Corporation,

Panchayats or Local authorities person holding constitutional posts.

Since all banking companies including cooperative banks satisfy all the

conditions of ‗service‘, their services shall be taxable, subject to provisions of

the service tax law.

Point of Taxation Rules, 2011

Point of taxation means the point in time when a service shall be deemed to

have been provided. Rule 3 is a general rule and applies in all the situations

for which no specific rules are prescribed.

Rule 3 – general rule

According to Rule 3, point of taxation is the date of invoice or payment,

whichever is earlier, if the invoice is issued within 30 days from the date of

completion of service. Date of completion of provision of service or payment,

whichever is earlier, if the invoice is not issued within 30 days. But in the

case of banking company, NBFC or financial institution, the time limit is 45

days instead of 30 days.

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 insofar 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 utilised.

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.


Authorised dealer

‗Authorised dealer of foreign exchange‘ is defined in section 2(c) of Foreign Exchange Management Act, 1999. Authorised dealer of foreign exchange

has been defined to have the meaning under section 2(c) of Foreign

Exchange management Act, who deals in foreign exchange to carry out

certain transaction in foreign exchange.

The authorised dealer should be a person authorised by the Reserve Bank of

India and must have obtained a licence to deal in foreign exchange.

Authorised dealer may be a person or a firm or a juristic person. Authorised

person means an authorised dealer, moneychanger, offshore banking unit

or any other person who deals in foreign exchange or foreign currency or

foreign securities. Thus, such person must be authorised by the Reserve

Bank of India to act as such.

Services provided by banks or authorised dealers of foreign exchange by way

of sale of foreign exchange to general public will not be covered in this entry.

This entry only covers sale and purchase of foreign exchange between banks

or authorised dealers of foreign exchange or between banks and such

dealers.

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 overdraft facility or a credit limit facility in

consideration of 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 is represented by way of interest or discount.


Repos/ reverse repos

Repos and reverse repos are financial instruments of short term call money

market that are normally used by banks to borrow from or lend money to

the RBI. The margins, called the repo rate or reverse repo rate, in such

transactions are nothing but interest charged for lending or borrowing of

money. Thus, they have the characteristics of loans and deposits for

interest. However, they are more appropriately excluded from the definition

of service itself, being the sale and purchase of securities, which are goods.

Commercial paper (‘CP’) and certificate of deposit (‘CD’)

Commercial paper (‗CP‘) and certificate of deposit (‗CD‘) are instruments for lending or borrowing money wherein consideration is represented by way of

a discount issue or subscription to CPs or CDs; these would be covered in

the negative list entry relating to ‗services by way of extending deposits, loans or advances insofar as consideration is represented by way of interest

or discount‘. It may also be borne in mind that promissory note is included

in the definition of money in the Act as given in clause (33) of section 65B.

However, if some service charges or service fees or documentation fees or

broking charges or such like fees or charges are charged, the same would be

consideration for provision of service and chargeable to service tax.

Credit cards

In case of a credit card, issuing entity allows the facility of payment of the

purchases made by the cardholder within a specified period failing which

some charges are levied. The question that arises is whether the credit so

extended for this payment is in the nature of a loan or advance for interest.

Interest for delayed payment of any consideration for the sale of goods or

provision of service has been specifically excluded from value by rule 6 of

valuation rules. Thus, ordinarily, any interest charged for delayed payment

of consideration would be outside the gambit of service tax.

However, in the case of credit cards, the credit extended is not for the

delayed payment of consideration for the provision of services; the services

in the case of the credit card are by way of levy of issuing charges or the

commission charged from merchants etc. The interest in this case is not for

the consideration for the use of the card. Thus, the benefit under the

valuation rules will not be available to credit card companies.

The other question is whether such credit extended will amount to loans or

advances. Loans and advances are meant to signify amounts contractually


negotiated as such (loan or advance) and not merely failure to pay an

amount at the due date. The exorbitant charges have also no relationship

with the prevailing interest for the same class of creditworthiness and are in

the nature of consideration for the services rendered for using the

convenience of using the services by way of a credit card and hence taxable.

Exempted services

Apart from services mentioned under negative list, there are specific

exemptions under Notification No. 25/2012-ST dated 20.06.2012.

However, no specific exemption relating to banks/ banking services are

covered under the said mega exemption notification.

Registration by banks

All the branches or offices of the bank, from where services provided, are

required to get registered under service tax. It could be by way of taking

centralised registration or separate registration for each branch.

The following are the few suggested service categories under which banks

generally take registration. However, it may vary from bank to bank

according to their sources of income and expenses.

As service provider

(i) Banking and other financial services

(ii) Renting of immovable property services

(iii) Other taxable services [Services other than the 119 listed] (e.g.

Director‘s sitting fee)

Under reverse charge

(i) Legal services

(ii) Sponsorship services

Specific provision for banks/ NBFCs for Cenvat credit

According to rule 6(3B) of Cenvat Credit Rules, a banking company and a

financial institution including a non-banking financial company engaged in

providing services by way of extending deposits, loans or advances shall pay

for every month an amount equal to fifty percent of the Cenvat credit availed

on inputs and input services in that month.

(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Jaipur)

Economy & Finance

All about service tax on banking services - Dr Sanjiv Agarwal