All about service tax on banking services - Dr Sanjiv Agarwal - Article published in Business Advisor, dated February 25, 2015 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. 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

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 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)

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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.

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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.

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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

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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)