Credit cards and service tax

[C.A. DEV KUMAR KOTHARI]

Article by Shri Seetharaman K.C.

In the article by Shri Seetharaman K.C. titled Service Tax charged by Banks on Interest/ Finance Charges charged on delayed Credit Card Payments learned author has rightly pointed out that credit card service providers are wrongly charging service tax on many of charges which are not subject to levy of service tax.

Reversal of charge and ST:

Credit card issuers many time reverse late payment charge, finance charges when an objection is raised by credit card holder. This is because many times  the charge is levied due to delay in collection by card issuer. When the charge itself is reversed, the corresponding service tax is also reversed as a consequence. However, when a late payment charge or financial charge is levied, most of credit card issuers are charging service tax, in case there is no reversal then service tax remain levied, though wrongly.

Reliance of old circular by card issuers:

Factually the credit card issuers are charging St based on old circular , which is no longer valid after amendment of provisions by way of  Valuation Rules for levy of service tax.
There should not be service tax on many items:

There should not be service tax on various items of charges which are not for any service rendered. Like late payment charges and interest or finance charges. These charges are compensatory or penal nature charges and not for any service rendered by the card issuer. Therefore, service tax should not be charged where:

No service is provided- e.g. cheque bouncing charges - which is in nature of damages.

Charge is in nature of interest on loans - cash withdrawals charges, payment to merchants, balance transfer charges in nature of interest, overdue payments charges etc.

Interest for late payment.

Prepayment charges for early payment of any loan taken on or through credit card element of interest or commitment charges in annual fees of credit card.

Credit Card old and new provision:

Earlier services relating to credit cards were included in the services of a banking company and financial institution including NBFC (Non-Banking Financial Company) and as per then prevailing circular credit card issuers started to levy service tax on almost all charges. And they are still continuing to burden card holders with the same.

Whether, the circular dt. 09.07.2001 is contrary to S.67 of the F.A. 1994 ?:

The credit card issuers are relying on Circular dt. 09.07.2001 for levying service tax on finance charges, late payment charges etc.

As per S.67 of the F.A. 1994 interest on loan is not to be included in taxable value of services rendered. Therefore, the above circular was clearly contrary to the provision of S.67 of the F.A. regarding interest and no service items, hence to that extent the circular was invalid being ultra virse to the main enactment, however, no one challenged circular, the card issuers collected ST and deposited.

New provision:

As per clause (iv) Rule 6(2) of Service Tax (Determination of Value) Rules 2006, any "interest" charged on the loans is not includible in value of taxable service.
This Rule is applicable to all service provider and not to any specific category of service provider. Credit cards are usually issued by bank or a SPV of bank which is NBFC. The exemption provided in the Rules are applicable to all service providers.

Unfortunately credit card issuers are still relying on old circular which itself was wrong an invalid on this aspect. Even after coming into force of valuation Rules, the banks and other credit card issuers are still charging service tax on many items of charges which should not be burdened with ST.

Credit card issuers are relying on play safe policy as they can easily collect service tax from card users.
A strong protest by credit card users is desirable however the problem is that most of card users who can capable to protest are extremely busy persons and others who avail lower credit limits have no means to protest. For this reason, credit card issuers are illegally collecting service tax on many items.

The credit card issuer must consider this problem from marketing point of view, due to levy of service tax loans or other credit facility through credit card the cost of finance goes up and if service tax is not levied then cost of finance will be reduced and better marketing of loans can take place.

Circular is desirable:

Credit card is also used by general public, therefore a clarification in form of circular is also desirable.

 

Discussions to this article

[Seetharaman K C]

Dear CA Kothari,

                             I am grateful that persons like you have taken up the issue relating to credit cards with the right earnest. I had written to the RBI Ombundsman who in turn forwarded the matter to the respective banks i e HDFC and Standard Chartered. I have received replies from both these banks quoting provisions which are of no relevance today. They claim that they are charging service tax on interest based on a circular issued by the department in 2001, when credit card services were classified under Banking and other financial services. Much water has flown under the bridge since then and credit card services have been shifted to a new service head, however still these banks still quote the old circulars which again is binding on the department only and not on the assessee. We need to sensitise more people on the issue so that more people start protesting about this illegitimate charge. Meanwhile I am also looking into the possibilty of going to court to file a PIL so that we see the end to this issue.

As someone has said " We must be the change ourselves and not be just bystanders". Lets get more of our learned friends here sensitised on the issue. The more we write on this issue the more we make people aware. So my dear friends please keep on writing.

The fact is that although we induvidually may be paying very little amounts of money, however all this put togther works out to hundreds of crores of hard earned money of our fellow country men which is being wrongly pocketed by the government and the banks are facilitating it.

[DEV KUMAR KOTHARI]

I think a concerted and collective effort is required by customers of banks for banking services as well as credit and debit card services. The banks are charging unreasonably to its customers in various forms like financial charges, interest,late payment charges, cheque bouncing charges, charges for failure to maintain minimum quarterly balance (MQAB) etc. The charges levied are very much disproportionate to the costs or loss suffered by bank. An association of banking and card customers can be a right platform to take such issues. One need to take an intiative.

[pradeep chamaria]

28-11-15

Dear sir,

I have taken the case for service tax charging in interest amount with 6-7 banks and all of them are giving different reasons of Service tax act and also making reference of as per RBI

I have got one stay order in favour of Canara Bank from CESTAT, Bangalore bench of 2012-who was not charging service tax on interest

Some of the banks are charging all type of interest in credit card like purchase converted in to EMI interest, Personal loan in credit card Cash advance interest, revolving credit interest etc

And some banks are charging only for revolving credit interest and cash advance interest

So the matter should be addressed to all the credit card users and a massive movement of inquiry to banks by credit card holders is required in this matter.

unofficial and off the record all the bankers has agreed that the service tax is not applicable to interest. BUT WHY THEY ARE CHARGING IS NOT KNOWN TO THOSE EXECUTIVES

Even one banks executive told me that we are charging on all type of interest but on his credit card of other bank is not charging service tax on interest of EMI and personal loan.

I had made a write up in my face account and trying to have a media movement on the issue. But for this I need a NGO who can make this case in consumer court and a PIL in High Court

If any NGO is interested they may contact me at my email [email protected]