INTRODUCTION: - SERVICE TAX

Service tax is a tax levied by Central Government of India on services provided or to be

provided excluding services covered under negative list and considering the Place of
Provision of Services Rules, 2012 and collected as per Point of Taxation Rules, 2011 from the
person liable to pay service tax. Person liable to pay service tax is governed by Service Tax
Rules, 1994 he may be service provider or service receiver or any other person made so
liable. It is an indirect tax wherein the service provider collects the tax on services from
service receiver and pays the same to government of India.[1] Few services are presently
exempt in public interest via Mega Exemption Notification 25/2012-ST as amended up to
date & few services are charged service tax at abated rate as per Notification No. 26/2012-ST
as amended up to date. Presently from 1 June 2015, service tax rate has been increased to
consolidated rate @ 14% of value of services provided or to be provided. The service tax rate
now is consolidated rate as education cess & secondary higher education cess are subsumed
with 2% of "Swachh Bharat Cess(0.50%)" has been notified by the Government
From 15 November 2015, the effective rate of service tax plus Swachh Bharat Cess, post
introduction of Swachh Bharat Cess, will be 14.5%.

HISTORY OF SERVICE TAX

Dr. Raja Chelliah Committee on tax reforms recommended the introduction of service tax.
Service tax had been first levied at a rate of five per cent flat from 1 July 1994 till 13 May
2003, at the rate of eight percent flat w.e.f 1 plus an education cess of 2% thereon w.e.f 10
September 2004 on the services provided by service providers. The rate of service tax was
enhanced to 12% by Finance Act, 2006 w.e.f 18.4.2006. Finance Act, 2007 has imposed a
new secondary and higher education cess of one percent on the service tax w.e.f 11.5.2007,
increasing the total education cess to three percent and a total levy of 12.36 percent. The
revenue from the service tax to the Government of Indiahave shown a steady rise since its
inception in 1994. The tax collections have grown substantially since 1994-95 i.e.
from 410 crore (US$61 million) in 1994-95 to132518 crore (US$20 billion) in 2012-13.
The total number of Taxable services also increased from 3 in 1994 to 119 in 2012. However,
from 1 July 2012 the concept of taxation on services was changed from a 'Selected service
approach' to a 'Negative List regime'. This changed the taxation system of services from tax

on some Selected services to tax being levied on the every service other than services
mentioned in Negative list.

Rates
While presenting the 2015 Union budget of India, the FM had increased the Service Tax Rate
from 12.36% to 14%. This new rate of Service Tax @ 14% was applicable from 1st June
2015. Moreover from 15th Nov 2015, Swachh Bharat Cess @ 0.5% also got applicable.
Therefore the effective rate of Service Tax is currently at 14.5% with effect from 15th Nov
2015.[3] 2016 Union budget of India has proposed to impose a Cess, called the Krishi
Kalyan Cess, @ 0.5% on all taxable services effective from 1 June 2016. The new effective
service tax could henceforth be 15%.

Service Tax Return, Records & Invoices

Records
According to Rule 5 of Service Tax Rules, 1994, records include computerized data and
means the record as maintained by an assessee in accordance with the various laws in force
from time to time. Records maintained as such shall be acceptable to Central Excise Officer.
Every assessee is required to furnish to the Central Excise Officer at the time of filing his
return for the first time a list of all accounts maintained by the assessee in relation to Service
Tax including memoranda received from his branch offices. This intimation may be sent
along with a covering letter while filing the service tax return for the first time

Invoice
Rule 4A prescribes that taxable services shall be provided and input credit shall be distributed
only on the basis of a bill, invoice or challan. Such bill, invoice or challan will also include
documents used by service providers of banking services (such as pay-in-slip, debit credit
advice etc.) and consignment note issued by goods transport agencies. Rule 4B provides for
issuance of a consignment note to a customer by the service provider in respect of goods
transport booking services.

RECENT CHANGES

Budget 2016 Update: Finance Minister while presenting the Budget 2016 introduced a new Cess
called the Krishi Kalyan Cess. This Cess would be levied on all taxable services and would
be levied @ 0.5% of the total value of service. This Cess would be levied over and above the Service
Tax and the Swachh Bharat Cess.
This Cess would be applicable from 1st June 2016. Before 1st June 2016 only Service Tax @ 14%
and Swachh Bharat Cess @ 0.5% would be applicable but from 1st June 2016 Krishi
Kalyan Cess would also be applicable and then the effective rate of tax would become 15%.
Before, 1st June it is 14.5%.

What is Service Tax?

It is a tax which is payable on services provided by the service provider. Just like Excise duty is
payable on goods which are manufactured, similarly Service Tax is payable on Services provided.
This Tax is payable by the provider of Service to the Govt. of India. However, the Service Provider
can collect this Tax from the Consumer of Service (also referred to as Recipient of Service)
and deposit the same with the Govt.

Applicability of Service Tax

This tax came into effect in 1994 and was introduced by the then Finance Minister Dr. Manmohan
Singh. Earlier Service Tax was payable only on a specified list of services but Pranab
Mukherjee while
delivering his budget speech on 16th March 2012 announced that this Tax would be applicable on
all services except the negative list of services. From 1st July 2012 onwards, all services (except
those specified in the negative list of services by the Govt) are now liable for service tax.

However, there are some services which are composite services. For eg: Food being served inRestaura
nt. Although VAT is levied on Food, but we dont go to a Restaurant only to have Food but
also to avail the services of the waiters, kitchen staff etc. Therefore, Service Tax is also leviedon
Food served in Restaurant. In such cases, it is practically impossible to segregate how much the
customer has paid for the food and how much he has paid for the services.

Such services are popularly known as Composite Services and in such cases an abatement
scheme is announced by the govt under which Service Tax is only levied only on a specified
portion of the Total Bill.

Service Tax On Cash Basis

Earlier Service Tax was charged on cash basis for every service provider. Currently, it is charged on
cash basis for Individual service providers and for companies it is being charged on accrual
basis i.e companies liability to deposit tax arises as soon as services are provided irrespective of
the collection of funds on the same.

However Individual Service Providers have to deposit this Tax with the Govt only when the Invoice
Amount has been collected. Service Tax Payment is deposited by the Service Provider with
the Govt. quarterly in case of Individuals/Partnership and Monthly in all other cases.

Moreover, every Service Provider is now required to apply for Service Tax Registration if the Value
of Services provided by him during a Financial Year is more than Rs. 9 Lakhs, but the Tax would
be payable only when the Value of Services provided is more than Rs. 10 Lakhs.
All service providers in India, except those in the state of Jammu and Kashmir, are required
to pay this tax in India. Service Tax is not levied on the persons residing in Jammu & Kashmir.
Service Tax Rate

The Service Tax Rate applicable from 1st June 2015 is 14%. This rate is an inclusive rate
and SHEC and Education Cess is not required to be charged above this.
This Tax is required to be deposited on a Monthly/Quarterly basis. It can be paid either by
manually depositing in the Bank or through Online Payment of Service Tax. In case, of
excess payment of Tax by the Service Provider with the Governement, the Service Provider
can either adjust the excess amount paid or can claim Refund of the Excess Tax deposited. Refer:
Service Tax Refund

Case Study
Lets understand via simple case, If a Chartered Accountant, provides services in the capacity of
auditor to ABC Ltd. and the audit fees is Rs. 1,00,000 then the service tax chargeable will
be 14.5% on Rs. 1,00,000 i.e. INR 14,000. Hence, the total billing to be done by CA to ABC Ltd will
be INR 1, 14,500.
The segregation of Value of Service Provided (i.e. Rs. 1,00,000) and the Tax payable thereon (i.e.
Rs. 14,500) shall be separately showing on the Invoice.
In case, no tax is separately charged in Invoice or the service receiver makes partial payment then
the service tax shall be proportionately taken to be amount as on the gross amount received
by the service provider for the taxable service provided or to be provided by him.

INTRODUCTION: - SERVICE TAX IN BANKING

Banking and financial services are subject to levy of Service Tax in more than one form.
While only specific services were taxed prior to 1.7.2012, all such services are taxable now
barring those which are in negative list.
W.e.f.1.07.2012, all services, other than services specified in the negative list, provided or
agreed to be provided in the taxable territory by a person to another would be taxed

under section 66B. Service' has been defined in clause (44) of the new section 65B and means

any activity

for consideration

carried out by a person for another

and includes a declared service.

In short, service means

any activity

carried out by a person for another

for consideration includes declared service but does not include

o transfer in title of goods or immovable property

o transaction in money or actionable claim
o provisions of service by employee to employer
o deemed sale of goods
o duties performed by MP/MLA/Members of Municipal Corporation, Panchayats or
Local authorities person holding constitutional posts.
Since all banking companies including cooperative banks satisfy all the conditions of
'service', their services shall be taxable, subject to provisions of the Service Tax law.

Negative List of Services

Meaning of Negative List (Clause 34 of Section 65B/Section 66D)
Negative list has been defined under clause 34 of section 65B and such services are specified
in section 66D of theFinance Act, 1994, as introduced by the Finance Act, 2012. Negative list
of services would mean the services specified in section 66D which specifies seventeen broad
categories of services. Only the following negative list entry is relevant for bank 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.

Interest
Interest has been defined in section 65B(30) of the Finance Act, 1994 as underinterest 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.
Such interest has to be paid or received in relation to

Money borrowed

Debt incurred

Deposit

Claim or other similar right or obligation

Any charges or amounts collected over and above the interest or discount amounts would
represent taxable consideration. Invoice 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.
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 services covered in negative list 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.

Repos / Reverse Repos

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
rate or reverse repo rate in such transactions are nothing but interest charged for lending or
borrowing of money. Thus, they have the characteristics of loans and deposits for interest.
However, they are more appropriately excluded from the definition of service itself being the
sale and purchase of securities, which are goods.
Commercial Paper (CP) and Certificate of Deposit (CD)
Commercial paper (CP) and Certificate of Deposit (CD) are instruments for lending or
borrowing money where in consideration is represented by way of a discount issue or
subscription to CPs or CDs would be covered in the negative list entry relating to services by
way of extending deposits, loans or advances insofar as consideration is represented by way
of interest or discount. It may also be borne in mind that promissory note is included in the
definition of money in the Act as given in clause (33) of section 65B.
However, if some service charges or service fees or documentation fees or broking charges or
such like fees or charges are charged, the same would be considerations for provision of
service and chargeable to service tax.

Credit Cards
In case of a credit card, issuing entity allows the facility of payment of the purchases made by
the card holder within a specified period failing which some charges are levied. The question
that arises is whether the credit so extended for this payment is in the nature of a loan or
advance for interest.
Interest for delayed payment of any consideration for the sale of goods or provision of service
has been specifically excluded from value by rule 6 of valuation rules. Thus ordinarily any
interest charged for delayed payment of consideration would be outside the gambit of service
tax. However in the case of credit cards the credit extended is not for the delayed payment of

consideration for the provision of services. The services in the case of the credit card are by
way of levy of issuing charges or the commission charged from merchants etc. The interest in
this case is not for the consideration for the use of the card. Thus the benefit under the
valuation rules will not be available to credit card companies.
The other question is whether such credit extended will amount to loans or advances. Loans
and advances are meant to signify amounts contractually negotiated as such (loan or advance)
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.

Exempted Services
Apart from services mentioned under negative list, there are specific exemptions
under Notification No. 25/2012 dated 20.06.2012. However, no specific exemption relating to
banks / banking services are covered under the said mega exemption notification.
Table showing Taxability of Income, Liability under Reverse Charge Mechanism (RCM)
and Cenvat Credit Eligibility
Particulars

Income /
Expenses

Taxability / RCM /
Cenvat Credit

Interest Received
Discount
Commission on Pay Order / Demand Draft / LC etc.
Commission from specified business other than
banking business (Insurance, Mutual Fund etc.)
Foreign Exchange Commission
Charges on non-maintaining minimum balance in
account
Subsidies
Profit from sale of / dealing with non-banking assets

Income
Income
Income
Income

Non- taxable
Non- taxable
Taxable
Taxable

Income
Income

Taxable
Taxable

Service Tax
to be
Deposited by

Bank
Service
Receiver
Bank
Bank

Income
Income

Non- taxable
Non-taxable

Lockers rent
Income on card business
ATM charges

Income
Income
Income

Taxable
Taxable
Taxable

Bank
Bank
Bank

Loan processing charges

Commission received on Bank Guarantee (BG)/
Letter of Credit (LC)
Charges for making Demand Draft (DD) / Payment
Order (PO)
Handling charges
Interest on late payment of Installment
Charges for issuance of cheque book
Renting of immovable property
Directors sitting fees

Income
Income

Taxable
Taxable

Bank
Bank

Income

Taxable

Bank

Income
Income
Income
Income
Expenses

Bank

Bank
Bank
Bank

Members fee
Rent, taxes, insurance and lighting expenses
Security Expenses
Law charges

Expenses
Expenses
Expenses
Expenses

Postage and Telegram Expenses

Telephone charges
Auditors fees
Repair and maintenance of premises / ATM machines
Revenue Stamps
Sweeping and cleaning charges
Loss from sale of or dealing with non-banking assets
Advertisement
Recovery Agent fees / commission

Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses

Taxable
Non- taxable
Taxable
Taxable
Cenvatable / under
RCM
Cenvatable
Cenvatable
Cenvatable
Cenvatable / under
RCM
Cenvatable
Cenvatable
Cenvatable
Cenvatable

Cenvatable
Cenvatable
Cenvatable / under
RCM

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

Bank

Bank

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 perSection 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.

Service tax finds several banking services

taxable on scrutiny
The Department of Service tax has found several banking services taxable on scrutiny
following the negative list of services.
According to officials close to the development, some of the contentious issues are availing
tax credit for payment of premium for insuring deposits, services rendered on behalf of the
Reserve Bank of India (RBI) and commission on foreign exchange business. At present
the banks treat most of these services exempt but they are not as per the department, sources
said
The Department of Service Tax has also issued show cause notices to several banks in raising
demand.
Explaining this, an official source said the banks pay premium to Deposit Insurance and
Credit Guarantee Corporation (DICGC) for insuring their deposit (fixed deposits, saving
banks deposits and current account) and pay 12% of the total amount paid premium as
service tax.
Then these banks take credit for the service tax paid on these items for payment of taxes on
other taxable services. The credit is availed by the banks for paying the service tax on
insuring these items (various deposits) as according to banks these deposits are output
services as per service tax rules.
However the Department is of the view that as per the rule 6 of the Cenvat Credit rules 2004,
these deposits form part of negative services and not output services. Cenvat rules make it
obligatory to get credit for payment of taxes on output services and not negative services as
per the negative list. An output service is defined as any taxable service within taxable
territory of India but does not include negative services as per cenvat credit rules and reverse
charge payments.
While the department has found several omissions by the banks on this account in its scrutiny
amounting to a lapse of around Rs 2,000-2,500 crore across the banking sector, this issue is
still is under deliberation, said sources
Similarly, the RBI pays commission to the banks for collecting government taxes customs,
service tax, income tax etc. These are services rendered by the banks on behalf of the RBI.
While department contends that banks should pay service tax on the commission received,
banks at present do no pay service taxes.

Kerala Bench of CESTAT (Customs, Excise and Service Tax Appellate Tribunal) held that
banks will not pay services tax on commission received from RBI on these services.
The department is of the view that as per the negative list, services rendered by RBI are
exempt from service but services to RBI and services undertaken on behalf of the RBI are
taxable as these are rendered free. These banks receive commission for these services
discharged on behalf of the RBI and hence should pay service tax.
To this effect, a total demand has been firmed up to the tune of Rs 80-100 crore and show
cause notices have been issued to banks.
BANKING SERVICES UNDER FINANCE ACT, 1994
The service provided by banking company will be covered under the definition of service
under section 65B (44) of
Finance Act, 1994.
Section 65B (44) of Finance Act, 1994 reads as below:
Service means any activity carried out by a person for another for consideration, and
includes declared services,
but does not include (i).. (ii) .. (iii) a transaction in money or actionable claim.
And further clause (n) of section 66D Negative List of Services specifies certain services
related to banking services as non taxable which reads as follows
Services by way of:
1. Extending deposits, loans and advances in so far as the consideration is represented by way
of interest and discounts.
2. Inter se sale or purchase of foreign currency amongst banks or authorized dealers of
foreign exchange or amongst banks and such dealers
By the virtue of above read sections all the income earned by bank will fall under service tax
net except income in the nature of interest or discounts and sale and purchase of foreign
currency amongst banks and financial institutions.
DEPOSITS, LOANS OR ADVANCES
The meaning of deposits, loans or advances as explained in CBECs Education Guide are
replicated below:
a. 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.
b. Providing a loan or overdraft facility or a credit limit facility in consideration for payment
of interest or discountc. Mortgages or loan with a collateral security to the extent that the

consideration for advancing such loans or advances is represented by way of interest or

discounts.
d. Corporate deposits to the extent that the consideration for advancing such loans or
advances are represented by way of interest or discount.
INTEREST OR DISCOUNT
The word interest has been defined under section 65B (30) as:
Interest means interest payable in any manner in respect of any moneys borrowed or debt
incurred (including a deposit, claim or similar rights or obligations) but does not include any
service fee or other charges in respect of moneys borrowed or debt incurred or in respect of
any credit facility which has not been utilized
And further clause (iv) of rule 6 (2) [rule 6 of service tax (determination of values) Rules
2006] which specifies the inclusion and exclusion of value of taxable services specifically
exclude Interest on delayed payment from value of taxable services. The said rule reads as
follows
Interest on delayed payment of any consideration for the provision of service or sales of
property, whether movable or immovable
In the light of the above read provision and rules, it is clarified that interest payable on
deposit, loans or advances and interest on delayed payment are fall outside the gambit of
service tax and no tax is payable on such services.
However service fee or any other charges in respect of money borrowed or debt incurred or
any part of unutilized credit facility does not comes under the meaning of interest. Hence on
such charges or fees service tax is payable.
SALE OR PURCHASE OF FOREIGN CURRENCY
Clause (n) (ii) of section 66D excludes sale or purchase of foreign currency from leviability
of service tax, if such sale or purchase takes place:
a. Amongst banks
b. Amongst authorized dealers
c. Amongst banks and such dealers
Service tax is not leviable in sale or purchase of foreign currency only when such service
takes place amongst the persons authorized to deal in foreign currency. The tax is payable
when sales or purchases takes place to/from the final consumers of foreign currency.
As per rule 2B of service tax (determination of value) Rules, 2006 value of purchase and
sales of foreign currency including money changing provided by banks shall be determined
by the service provider as follows:

SERVICES PROVIDED BY THE RBI

Services provided by the RBI are non taxable services as the same specified under Negative
List of Services. Clause (b) of section 66D reads as follows:
Services by the Reserve Bank of India Only the service provided by RBI is non-taxable
service but not:
a. Any services provided to RBI
b. Services provided by any other subsidiary banks of the RBI.
c. When similar services provided by other banks authorized by the RBI
There are some services where the service recipient is liable to pay service tax. If any such
services are received by the RBI, then it will be liable to pay service tax under reverse
charges.

Banking and financial service

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 percent 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 CEBECs

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.