FINANCIAL SERVICES UNDER NEGATIVE LIST

[Dr. Sanjiv Agarwal]

Clause N of 66D of Finance Act, 1994 provides for the following entry in Negative List -

Services by way of-

(i) extending deposits, loans or advances in so far 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;

The above mentioned two specified services have been included in negative list.

For the purpose of this entry, interest has been defined in section 65B(30) 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 utilized.

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. Also such ‘interest’ has to be paid or received in relation to –

• Money borrowed
• Debt incurred
• Deposit
• Claim or other similar right or obligation

However, in section 2(28A) of Income Tax Act, 1961, the expression ‘interest’ has been defined to mean interest payable in any manner in respect of any money borrowed or debt incurred (including a deposit claim or other similar right or obligation) and includes any service, fee or other charge in respect of the moneys borrowed or debt incurred in respect of any credit facility which has not been utilized.

Thus, there is a vast difference in scope of ‘interest’ in direct tax and service tax. In service tax, scope of interest has been limited to restrict inclusion of fee, service charge or other charges.

‘Authorized 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 of carry out certain transaction in foreign exchange. The authorised dealer should be a person authorised by Reserve Bank of India and must have obtained a license to deal in foreign exchange. Authorised dealer may be a person or a firm or a juristic person. Authorised person means an authorized dealer, money, changer offshore banking unit or any other person to deal in foreign exchange or foreign currency or foreign securities. Thus, such person must be authorized by Reserve Bank of India to act as such.

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 negative services 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 over draft facility or a credit limit facility in consideration for 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 are represented by way of interest or discount.

The services of loans, advances or deposits are exempt in so far as the consideration is represented by way of interest or discount. Any charges or amounts collected over and above the interest or discount amounts would represent taxable consideration.

Invoice (Bills) 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.

Services provided by banks or authorized 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 authorized dealers of foreign exchange or between banks and such dealers.

CBEC Guidance Note dated 20.06.2012 has clarified on taxability of ‘repo’ and ‘reverse repo’ instruments, trading on commercial papers, certificate of deposit and credit card dues and forward and future contracts as under –

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 RBI. The margins, called the repo 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.

Corporate guarantees are often given or issued by business entities to provide comfort to lenders or bankers. This may yield certain income to the entity giving corporate guarantee in the form of fees or commission. Corporate guarantee is not covered under any entry of negative list or more particularly in financial services and as such, these will be subject to levy of Service Tax. In Olam Agro India Ltd. v. CCE - 2013 (11) TMI 1010 - DELHI HIGH COURT, where Department wanted to levy of Service Tax on corporate guarantee commission received from a subsidiary company, it was held that prima facie, corporate guarantee provided to a bank for loans taken by another entity fall outside the banking or financing services.

In Sparekassernes Datacentre (SDC) v. Skatteministeriet (2013) 39 STT 110 (ECJ), it was held that transaction related to interest/discount from extending deposits, loans and advances were covered under negative list, which were to be defined according to nature of services provided and not according to person supplying or receiving services and the negative list entry was broad enough to include credit granted by the supplier of goods in form of deferral of payment .Hence, scope thereof was not limited only to loans and credits granted by banking and financial institutions.