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Clarity in service tax needed

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Mohan R Lavi New Delhi
Last Updated : Jun 14 2013 | 3:35 PM IST
The series of notifications under the service tax continues unabated. Notification numbers 29/2004 and 30/2004 both dated September 22, 2004 have been issued with the ostensible purpose of bringing some clarity into the service tax charged by banks on banking operations.
 
Notification No 29/2004 exempts so much of the value of taxable service provided to a customer, 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"" overdraft facility; cash credit facility; or discounting of bills, bills of exchange or cheques"" as is equivalent to the amount of interest on such overdraft, cash credit or, as the case may be, discount, from the service tax leviable thereon under section 66 of the said Act, subject to the condition that the said interest amount is shown separately in an invoice, a bill or, as the case may be, a challan issued for this purpose.
 
This notification asks more questions than it answers. Banking has changed to a great extent these days and all facilities given by banks cannot be classified as only overdraft, cash credit or discounting of bills.
 
Corporates are increasingly moving towards corporate loans while the top bracket ones also get mezzanine funding from banks. A plain reading of the Notification would make these loans exigible to the service tax. Banks charge penal interest on loans that are paid late- the notification is silent as to whether any type of interest would qualify for this exemption.
 
In case there is a surplus in the cash credit account, banks give a nominal interest to the borrower. It is not going to be long before borrowers ask for a set-off of this interest from the interest charged on the loan.
 
In the case the non-performing asset accounts, the banks charge interest for some period of time and park it in a suspense account. Depending on the performance of the account, subsequent interest is charged or stopped.
 
Whether service tax is applicable on interest charged on NPA accounts is another question that needs to be answered. In the case the NPA account is chronic and turns bad, banks would end up bloating their NPA kitty by 10.2 per cent.
 
In the case of certain NPA accounts, banks forego a portion of the interest and principal on the loan. Since service tax is to be paid on receipt basis, what would happen to the service tax component on the interest foregone is something that needs to be notified.
 
The Notification seems to only skim the surface of banking activities. Demand drafts, Pay orders, issue of cheque books and operating of lockers would all now be dearer by 10.2%. Since banks only charge rent on lockers, whether it would qualify for levy of service tax is a moot point.
 
If one extrapolates this line of thinking, all rents should come under the purview of the service tax which defeats the fundamental concept of a tax on services.
 
Notification no 30/2004 states that in case the provider of taxable service is a banking company or a financial institution including a non-banking financial company, or any other body corporate or commercial concern, providing service to a customer, in relation to banking and other financial services, an invoice, a bill or, as the case may be, challan shall include any document, by whatever name called, whether or not serially numbered, and whether or not containing address of the person receiving taxable service but containing other information in such documents as required under this sub-rule.
 
This notification has obviously been issued to set at rest any doubts whether banks would issue an invoice for the service tax component charged by them.
 
Since even a printout of the pass book would qualify as a document, banks need to rejig their information systems to provide for a separate column for Service Tax since Service Providers would not like to forego the service tax credit available to them.

 

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First Published: Nov 22 2004 | 12:00 AM IST

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