Tuesday, April 1, 2014

service tax on banking and financial service

1.      Banking and financial service

1.1.     Definition:
Finance act, 1994 has stated following definition relating to banking and financial services:
As per section 2(14) of the act "authorised dealer of foreign exchange" shall have the meaning assigned to "authorised person" in clause (c) of section 2 of the Foreign Exchange Management Act, 1999
As per section 2(30) of the act, "interest" has the meaning assigned to it in clause (28A) of section 2 of the Income-tax Act, 1961
As per section 2(33) of the act, "money" means legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any similar instrument but shall not include any currency that is held for its numismatic value;
As per section 2(42) of the act, "Reserve Bank of India" means the bank established under section 3 of the Reserve Bank of India Act, 1934.
As per section 2(43) of the act, "securities"(1) has the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956;
Mega exemption notification no. 25/2012-ST, dated 20th June, 2012, “banking company” has the meaning assigned to it in clause (a) of section 45A of the Reserve Bank of India Act, 1934.
As per notification no - 26/2012, Service Tax, 20th June, 2012 - “chit” means a transaction whether called chit, chit fund, chitty, kuri, or by whatever name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to a prize amount.
As per Place of provisions of rule, 2012, "non-banking financial company" means-
(i)      a financial institution which is a company; or
(ii)    a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; or
(iii)  such other non-banking institution or class of such institutions, as the Reserve Bank of India may, with the previous approval of the Central Government and by notification in the Official Gazette specify
1.2.     Exemption on transaction relating to banking and financial service:
As per section 66D(b) negative list of services, services provided by Reserve Bank of India would be exempt from service tax.
As per section 66D(n) –negative list of services, following activities would be exempt from service tax: 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 authorized dealers of foreign exchange or amongst banks and such dealers.
Examples on the above negative services are:
·         Fixed deposits or saving deposits or any other such deposits in a bank or a financial institution for which return is received by way of interest.
·         Providing a loan or overdraft 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.
Further, as per entry no. 29 of mega exemption notification 25/2012-ST, dated 20th June, 2012, services provided by a business facilitator or a business correspondent to banking company or an insurance company, in a rural area would be exempt from service tax. (“business facilitator or business correspondent” means an intermediary appointed under the business facilitator model or the business correspondent model by a banking company or an insurance company under the guidelines issued by Reserve Bank of India)
1.3.     Valuation of service
Options for determination of service tax on sale and purchase of foreign exchange to others:
Option1 : Service tax on value of service: As per Rule 2B of service tax (Determination of Value) Rules, 2011 and text of Guidance notes on service tax issued by CBEC on 20th June, 2012 valuation would be done in following manner:
·         Manner of determination of value of service in relation to money changing including sale and purchase of foreign currency: If a currency is exchanged from or to Indian Rupees then, as per Rule 2B of the Valuation Rules, the value of taxable service shall be equal to the difference in the buying rate or the selling rate, as the case may be, and the RBI reference rate for that currency. For example if US$ 1000 are sold by a customer @ Rs55 per US$ and RBI reference rate for US$ is Rs.55.73 then the taxable value shall be Rs.730 (1000 x 0.73).
·         Manner to determine value if the RBI reference rate for a currency is not available: As per the first proviso to Rule 2B in case RBI reference rate for a currency is not available the value shall be 1% of the gross amount of Indian Rupees provided or received by the person changing the money.
·      Manner to determine value of taxable service if foreign currency is exchanged for another foreign currency: These situations are dealt with in second proviso to Rule 2B as per which in such situations the value of taxable service shall be equal to 1% of the lesser of the two amounts the person changing the money would have received by converting one of the currencies into Indian Rupees on that day at the reference rate provided by RBI.
Option 2: Composition scheme: As per Rule (7B) of service tax Rules, person liable to pay service tax has option to pay service tax at following rates, instead of full rate of service tax:
·        0.12 per cent. of the gross amount of currency exchanged for an amount upto rupees 100,000 subject to the minimum amount of rupees 30; and
·         Rupees 120 and 0.06 per cent. of the gross amount of currency exchanged for an amount of rupees exceeding rupees 100,000 and upto rupees 10,00,000; and
·       Rupees 660 and 0.012 per cent. of the gross amount of currency exchanged for an amount of rupees exceeding 10,00,000, subject to maximum amount of rupees 6000
The person providing the service shall exercise above option for a financial year and such option shall not be withdrawn during the remaining part of that financial year.
Service tax on services provided in relation to Chit funds: As per notification no. 26/2012-ST dated 10-6-2012, service tax would be payable on 70% of amount charged subject to Cenvat credit on input, input services and capital goods is not availed.
1.4.     Place of provision of service
As per rule 9 of place of provisions rules, 2012, place of provision of services in case of Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders shall be the location of the service provider.
CBEC has provided following clarification in Text of Guidance notes on service tax issued by CBEC on 20th June, 2012:
Meaning of “account holder”: “Account” has been defined in the rules to mean an account which bears an interest to the depositor. Services provided to holders of demand deposits, term deposits, NRE (non-resident external) accounts and NRO (non-resident ordinary) accounts will be covered under this rule.
Banking services provided to persons other than account holders will be covered under the main rule (Rule 3- location of receiver).
Services that are provided by a banking company to an account holder (holder of an account bearing interest to the depositor)
Following are examples of services that are provided by a banking company or financial institution to an “account holder”, in the ordinary course of business:-
i) services linked to or requiring opening and operation of bank accounts such as lending, deposits, safe deposit locker etc;
ii) transfer of money including telegraphic transfer, mail transfer, electronic transfer etc.
Services that are not provided by a banking company or financial institution to an account holder, in the ordinary course of business, and consequently not to be covered under this Rule:
Following are examples of services that are generally NOT provided by a banking company or financial institution to an account holder (holder of a deposit account bearing interest), in the ordinary course of business:-
i) financial leasing services including equipment leasing and hire-purchase;
ii) merchant banking services;
iii) Securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing;
iv) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services;
v) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;
vi) banker to an issue service.
In the case of any service which does not qualify as a service provided to an account holder, the place of provision will be determined under the default rule i.e. the Main Rule 3. Thus, it will be the location of the service receiver where it is known (ascertainable in the ordinary course of business), and the location of the service provider otherwise.
1.5.     Cenvat credit restriction
As per rule 6(3B) of Cenvat credit rule, 2004, a banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances, shall pay for every month an amount equal to fifty per cent. of the CENVAT credit availed on inputs and input services in that month.
1.6.     Records of banking and financial institutions
As per rule 4A of service tax rule, 1994, if provider of taxable service is a banking company or a financial institution including a non-banking financial company providing service to any person, then:-
·         Within 45 days the invoice, bill or challan, as the case may be, is to be issued
·         an invoice, a bill or, as the case may be, challan shall include any document, by whatever name called, whether or not serially numbered, and whether or not containing address of the person receiving taxable service.
1.7.     Relevant notifications and circulars:
Taxability on transaction relating banking and financial services clarified in CEBEC’s Taxation of service: An Education Guide issued on 20th June, 2012:
·         Transaction in Commercial Paper (CP) or Certification of Deposit (CD): Transaction like Issue, subscription or trading in CP and CD would be outside ambit of definition of ‘Service’.
·         Invoice discounting or cheque discounting or any other similar form of discounting: Such discounting would be exempt from service tax only to the extent consideration is represented by way of discount.
·         Transaction in Repos and reverse repos: Such transaction would be outside ambit of definition of ‘service’.
·         Transaction in forward contracts in commodities and currencies or future contracts: Such transaction would be outside ambit of definition of ‘service’.
·         Charges for making drafts, letter of credit issuance charges relating to CP/ CDs: Such charges would be chargeable to service tax subject to other element of taxability are present.
·         Service charges or administration charges received in addition of interest on a loan, advance or a deposit: Such charges would be chargeable to service tax subject to other element of taxability are present.
·       Service charges, service fees, documentation fees, broking fees or such like fees or charges charged on forward contract, future contracts, repos/reverse repos, CD, CPs: Such charges would be chargeable to service tax subject to other element of taxability are present.
·     Late payment of dues on credit card outstanding: Charges for late payment of dues on credit card outstanding would be chargeable to service tax. Further, credit extended after due date of payment on credit card will not amount to loans and advances but the same would be considered in nature of consideration for the services rendered for using the convenience of using the services by way of a credit card and hence taxable.
·      Pre-closer charges, commitment charges, fore-closer charges, charges for pre-payment of loan, reset or restructuring loan charges: Such charges would be chargeable to service tax subject to other element of taxability are present.
·        Sale and purchase of foreign exchange: sale and purchase of foreign exchange between banks or authorized dealers of foreign exchange or between banks and such dealers would be exempt from service tax. However, services provided by banks or authorized dealers of foreign exchange by way of sale of foreign exchange to general public would not be exempt under negative list of services.
1.8.     Judgments
·         Madhav Nagrik Sahkari Bank v. CCE (2012) 35 STT 154 (CESTAT) - Cooperative banks are subject to service tax.
·         Punjab national Bank v. CCE, Chandigarh (2009) 14 STR 465 (Cestat, New delhi) service of MICR (magnetic ink character recognition) for cheque clearing was held as taxable service.
·         State bank of India v. CST, Kolkata (2009) 16 STR 640 (Cestat, Kolkata) – cheque processing services are liable to service tax.

·         Housing Development Finance corporation ltd v. CST, Ahmedabad (2012) 34 STT 129 (Cestat, Ahmedabad) - reset charges and pre-payment charges can be considered as cost incurred by borrow and the same were liable to service tax.

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