SERVICE TAX ON BANKING SERVICES
INTRODUCTION
Bankers acts as an
agent by conducting checking of current accounts for customers, paying cheques
drawn on customers of the bank, collecting cheques deposited to customer’s
current accounts and accepting deposits and lending loans, enable customer
payments via automated clearing house, telegraphic transfer, mail transfer,
electronic transfer etc., By providing the above mentioned services, bankers
earn income by way of interest or discount, rental charges, service charges,
commission and operational charges The taxability under Finance At, 1994 of
various such services provided by banking company discussed below.
BANKING
SERVICES UNDER FINANCE ACT, 1994
The service provided
by banking company will be covered under the definition of service under section
65B (44) of Finance Act, 1994.
Section 65B (44) of
Finance Act, 1994 reads as below:
“Service means any
activity carried out by a person for another for consideration, and includes
declared services, but does not include (i)….. (ii) ….. (iii) a transaction in
money or actionable claim”.
And further clause
(n) of section 66D “Negative List of Services” specifies certain services
related to banking services as non taxable which reads as
follows
“Services by
way of:
1.
Extending deposits, loans and advances in so far as the consideration is
represented by way of interest and discounts.
2. Inter se sale or
purchase of foreign currency amongst banks or authorized dealers of foreign
exchange or amongst banks and such dealers”
By the virtue of
above read sections all the income earned by bank will fall under service tax
net except income in the nature of interest or discounts and sale and purchase
of foreign currency amongst banks and financial
institutions.
DEPOSITS,
LOANS OR ADVANCES
The meaning of
deposits, loans or advances as explained in CBEC’s Education Guide are
replicated below:
a. 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.
b. Providing a loan
or overdraft facility or a credit limit facility in consideration for payment
of interest or discount
c. Mortgages or loan
with a collateral security to the extent that the consideration for advancing
such loans or advances is represented by way of interest or
discounts.
d. Corporate
deposits to the extent that the consideration for advancing such loans or
advances are represented by way of interest or
discount.
INTEREST OR
DISCOUNT
The word
‘interest’ has been defined under section 65B (30)
as:
”Interest means
interest payable in any manner in respect of any moneys borrowed or debt
incurred (including a deposit, claim or similar rights or obligations) but does
not include any service fee or other charges in respect of money’s borrowed or
debt incurred or in respect of any credit facility which has not been
utilized”
And further clause
(iv) of rule 6 (2) [rule 6 of service tax (determination of values) Rules 2006]
which specifies the inclusion and exclusion of value of taxable services
specifically exclude ‘Interest on delayed payment’ from value of taxable
services. The said rule reads as follows
“Interest on delayed
payment of any consideration for the provision of service or sales of property,
whether movable or immovable”
In the light of the
above read provision and rules, it is clarified that interest payable on
deposit, loans or advances and interest on delayed payment are fall outside the
gambit of service tax and no tax is payable on such services. However service
fee or any other charges in respect of money borrowed or debt incurred or any
part of unutilized credit facility does not comes under the meaning of interest.
Hence on such charges or fees service tax is payable.
SALE OR
PURCHASE OF FOREIGN CURRENCY
Clause (n) (ii) of
section 66D excludes sale or purchase of foreign currency from leviability of
service tax, if such sale or purchase takes place:
a. Amongst
banks
b. Amongst
authorized dealers
c. Amongst banks and
such dealers
Service tax is not
leviable in sale or purchase of foreign currency only when such service takes
place amongst the persons authorized to deal in foreign currency. The tax is
payable when sales or purchases takes place to/from the final consumers of
foreign currency.
As per rule 2B of
service tax (determination of value) Rules, 2006 value of purchase and sales of
foreign currency including money changing provided by banks shall be determined
by the service provider as follows:
S.NO
|
Condition
|
Computation
|
1
|
When Exchange rate is from/to Indian
currency
|
(Selling rate minus Buying rate) multiplied by RBI
Reference rate for that period
|
2
|
When RBI reference rate for that currency is not
available
|
1% of the gross amount of INR provided or received
by the service receiver.
|
3
|
Neither of the currency is exchanged in Indian
currency
|
1% of the two amounts of the currency exchanged by
converting into INR at rate provided by
RBI
|
Rule 6(B) of service
tax rules provides an option to pay service tax for service provider of purchase
and sale of foreign currency including money changing as
below:
Limit (gross amount of currency
exchanged)
|
Rate of Tax (on gross amount of currency
exchanged)
|
Upto Rs 1,00,00
|
0.12%
|
Above Rs 1,00,000 upto Rs.
10,00,000
|
Rs.120 + (0.06% of amount exceeding Rs.
1,00,000)
|
Above Rs 10,00,000
|
Rs. 660+ (0.012% of amount exceeding Rs. 10,00,000)
subject to maximum of
Rs.6,000/-
|
If a service
provider exercise the above option he need not compute service tax at the rate
specified under section 66B (i.e., @12.36% on the value of service provided).
Once the service provider opts to pay tax under this rule, he must follow the
method of payment for the entire financial year and shall not be withdrawn
during the remaining part of the financial year.
SERVICES
PROVIDED BY THE RBI
Services provided by
the RBI are non taxable services as the same specified under ‘Negative List of
Services’. Clause (b) of section 66D reads as follows:
“Services by the
Reserve Bank of India”
Only the service
provided by RBI is non-taxable service but not:
a. Any services
provided to RBI
b. Services provided
by any other subsidiary banks of the RBI.
c. When similar
services provided by other banks authorized by the RBI
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SERVICE TAX ON BANKING SERVICES
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