Service Tax on pre-closure charges received by the banks / financial institution on pre-payment of loan.

All the banks engaged in lending of money is facing an issue relating to applicability of Service Tax on fore-closure / pre-closure charged towards pre-payment of loan amount.

In several cases, department has issued show cause notices and in some cases, the matter is still pending before CESTAT for final decision.

In the meantime, department has issued a clarification that, fore-closure charges received by the banks / financial institutions can not be treated as interest and therefore, liable to service tax.

See. F No 345/6/2008-TRU dated 11-6-2008.