Tax net may get wider for credit card services

Banks argue commissions not fee.

The Central Board of Excise and Customs is examining the possibility of making a case for charging service tax with retrospective effect from 2001 on "service charges" and "commissions" received by banks on services rendered in relation to credit cards.

According to officials, several banks including American Express, SBI, Standard Chartered, ICICI and HSBC could come under the scanner of the revenue department regarding the collection of such charges.

The argument of the department is that service charges recovered by the banks on account of swiping of credit cards and commissions received by the visa or master cards or the card issuing bank fall in the category of services. These are, therefore, amenable to service tax under the category of "banking and financial services" with effect from July 2001, they said.

The Indian Banks' Association has already expressed to the government its opposition to the proposal. "Technically, this is a sort of funding arrangement with merchant establishments. Besides, this was not mentioned in the coverage of service tax at the time the circular was issued by the government. It is not a fee that banks are receiving during their dealings with customers," said an IBA executive.

But officials said, "There are a number of banks which are providing services as the acquiring bank in respect of credit card transactions and charging service charges in the form of commissions, discounts or service charge from shopkeepers or stores.".

In a credit card transaction, an "acquiring bank" refers to banks which install the card swiping machines (called EDC terminals) in shops and other such commercial establishments for swiping of credit cards. There are four such acquiring banks in the country "" HDFC, HSBC, ICICI and Citibank.

When a merchant swipes the credit card belonging to a customer, an online information is transmitted to the acquiring bank, which in turn passes it on to the credit card issuing bank. The card issuing bank checks the authenticity of the card and reverts with an authorisation code to the acquiring bank online.

The acquiring bank receives a merchant sales commission, discounts or service charges at a rate varying from two to five per cent of the transaction value for providing its services to shopkeepers. It is this amount which is proposed to be taxed under service tax.

Tax experts, however, contend that the proposed move of the department goes against a clarification issued by the department in 2001 which had stated that service tax was sought to be imposed only on services such as subscription fee, late payment fee etc provided by the card issuing bank to card holders.