Service Tax charged by Banks on Interest/ Finance Charges charged on delayed Credit Card Payments

[Seetharaman K C]

It has come to my notice that several banks are charging service tax on interest and finance charges on credit card payments. In certain cases although the nomenclature is clearly mentioned as "Interest" still the bank has charged service tax. In this case when I protested about this issue by sending an email to the bank I got an immediate reply reversing the Interest and service tax.

Although I considered myself fortunate to have saved some money in the bargain, I think this situation needs serious correction. The crux of the matter is that most Banks have an unwritten policy to charge service tax on almost all services which they provide probably to be on the safe side to avoid entering into litigation with the department. They end up charging the customer who rarely has the time or in most cases the know-how to question these charges and when someone question they hastily refund the amount.

I trust that most of my intellectually enlightened brethren would agree that as much as we all believe that "We should give Caesar what is due to him" we should also believe that "We should not give Caesar what is not due to him".

In line with this policy, I emailed the relevant banks saying that charging service tax on interest/ finance charges is not in order and it does not matter whether you refund my interest or not, the very basis of the charge is defective due to reasons which I have explained below. In my case, in the case of two banks service tax has been charged on interest and finance charges for which I had sent my objections to them. The replies received from these banks were unsatisfactory and virtually stated that these charges are done as per the "Service Tax Provisions" none of which was quoted in the letter.

 To clarify the position as per Service tax law, the relevant provisions are listed as follows:

* As per Section 65(105)(zzzw) of Finance Act, 1994, "credit card or other payment card services" are "services 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." The value for the taxable service will be the gross amount charged by the service provider for such services. The basic element of taxability under this head is that the transaction should amount to "Service", which is not satisfied in the case of Interest charged on delayed payments.

* There is another head which is relevant to this discussion i.e. "Banking and Other Financial Services". As per Section 65(105)(zm) introduced in the Finance Act, 1994, "Banking and Other Financial Services" are "Services provided or to be provided to a customer by a banking company or a financial institution, including a non-banking financial company, or any other body corporate or any other person in relation to banking and other financial services."

* In terms of Section 65(12) of the Act, banking and financial services specifically include lending of money.

* Any loan given by a bank, even though it is a short term loan under a credit card is lending by a bank and as such this service will be more appropriately be covered under the head "Banking and other Financial Services".

* Finally, for calculating the taxable value of the services, as per clause (iv) Rule 6(2) of Service Tax (Determination of Value) Rules 2006, any "interest" charged on the loans advanced cannot be included.

Under such circumstances, the bank cannot charge any service tax either on the repayment amounts or the interest charged on the principal amounts.

Service tax can only be charged on the amounts collected as their charges for providing the loan , under heads such as `administrative expenses', `commissions', `service charges', processing fees etc.

I feel this situation needs to be addressed and corrected and someone needs to start the process and hence this article so that when you are making your credit card payments please make sure that you are not paying service tax on interest charged on delayed payments.

I am sure that if you protest the bank will end up reversing the interest charged also.

 

Discussions to this article

[DEV KUMAR KOTHARI]

Loans given on credit cards by way of balance transfer, or cash on call are nothing but loan, similarly extended credit by way of conversion of purchase in loan to be paid in EMI is a loan. late payment charge is not for any service and in nay case it is interest, Finance charges are also interest on loan. Therefore, any interest on loan, called in whatever name should not be subject to service tax as it is interest on loan. Where there is no service but a penalty is imposed, there should not be service tax. However, credit card issuers are playing totally safe and considering all such charges as charges for services on credit cards and following old circular and ignoring amended Rules. As rightly pointed out by the author, Seetharaman K C, card holder being busy and not aware of provisions are unable to protest, and card issuers are levying service tax on items on which it should not be levied. The author was lucky as interest was reversed, so the reversal of ST was automatic, in case interest is not reversed, service tax is being charged by most of credit card issuers. Readers may read an article written by me and web hosted on this website in relation to credit cards.