-
Introduction
Banking and Financial Services are today no longer confined to
the primary activity of procuring deposits and lending money on interest.
Banks are Universal Banks providing a one-stop solution to their customers
tailored to meet varied business needs. Banks offer a financial supermarket
with a variety of innovative products like retail banking encompassing
structured deposits, consumer loans, credit/debit cards; corporate
banking with products like working capital finance, project finance,
securitisation, cash management services and other non fund based
facilities like guarantees, letters of credit, escrow agency services,
etc. Apart from retail and corporate banking, banks contribute to
the growth of the critical infrastructure sector by providing financial
assistance as well as advisory services. Banking business has crossed
international boundaries with international alliances to develop market
share outside India. Customized services like investment banking and
portfolio management are provided to non-resident Indians, foreign
nationals and other foreign entities. The banking strategy has focused
sharply on rapid growth in fee-based services, extensive use of technology
and cross selling banking products and services. Fee income is an
important component of a Bank’s Balance Sheet. The entry of foreign
banks and the new private sector players has added a lot of competitiveness
to the banking business.
Internationally, most of the countries
across the globe, especially, the European Union countries have implemented
a common goods and services tax by way of a Value Added Tax (VAT)
regime. This helps in elimination of cascading effect of multiple
layers of tax. In India, distinction is drawn between tax on goods
and tax on service. Goods are taxed under State and Central Tax Laws
by way of CENVAT, central Sales Tax, State Sales Taxes and other local
taxes like entry tax, works contract tax, etc. Services are separately
taxed by imposition of service tax on specific categories of services.
-
Scope of services
Under the category of Banking and Financial Services, Banks, Financial
Institutions (FIs) and Non Banking Finance Companies (NBFCs) are covered
in the service tax net from July 16, 2001. State Bank and its subsidiaries
were covered only from August 16, 2002 due to a lacunae in the earlier
definition of banking company which was broadened vide the Finance
Act, 2002. Similarly, body corporates were earlier excluded from the
scope of chargeable entities which led to an anomaly as specified
services rendered by banks were chargeable to service tax. Due to
this, banks, FIs and NBFCs were rendered uncompetitive compared to
corporate players. To illustrate, asset management services and merchant
banking services were rendered both by banks, FIs and NBFCs and corporates.
With a view to provide a level playing field, body corporates were
brought within the purview of chargeable services from August 16,
2002. Even today, co-operative banks and non-corporates (except forex
brokers) are not covered in the definition due to scope limitation
of the chargeable category of the service providers.
Banking and Financial Services contributed
to Rs. 44.7 cr. by way of service tax in 2001-02, which increased
to Rs. 174.56 cr. in 2002-03, comprising of around 4% of the total
Service tax revenue.
Under sections 65(104)(zm) and 65(104)(zp)
of the Finance Act, taxable services are defined to mean the services
provided by banks, FIs, NBFCs and body corporates to a customer in
relation to Banking and Financial Services. Two terms are important
in this context – ‘customer’ and ‘in relation to’ . It is relevant
to note that only service fees on services rendered to customers are
chargeable to service tax. The term ‘Customer’ is of a very wide import
and if one bank is a customer of another bank the service fee will
be chargeable to service tax. Consequently, if fees are received from
a non-customer, it will not be chargeable to service tax. To give
an example, if in respect of credit card services, a bank receives
fees from a merchant Establishment, the fees will not be chargeable
to service tax as the merchant is not a bank’s customer and only the
credit card holder is a bank’s customer. On the other hand, the term
‘in relation to’ being of a wide import covers services rendered by
banks both directly as well as indirectly to the customer.
The definition of chargeable services
under section 65(12) of the Act is an exhaustive definition covering
only 7 specified categories, which are chargeable to service tax.
The services rendered by a bank, FI, NBFC or body corporate if not
falling within these categories will not be chargeable to service
tax. However, if the services fall in any other category chargeable
under the Act will be chargeable under the respective head. To illustrate,
underwriting services are covered under a separate category ‘underwriting‘
under section 65(104)(z). Similarly, commission received on distribution
and marketing of mutual fund units is covered under the category ‘business
auxiliary services’ under section 65(104) (zzb) read with clarification
No. 66/15/2003–ST dated November 5, 2003. The service fees for provision
of safe deposit lockers/vaults by banks are meant to provide security
in respect of movable property, though covered under the head ‘Security
Agency Services’ are exempt from service tax vide notification no.
56/98-ST dated October 16, 1998. In absence of a residual clause,
fees that are not chargeable under any category under the Act are
not subject to service tax, e.g., loan documentation fees for processing
of loans.
The 7 specific categories chargeable
to service tax are described below:
-
Financial leasing and
hire purchase services
The lease and hire purchase rentals received on hire purchase
and finance leasing on industrial and retail financing are charged
to service tax on the interest component of the rentals under
CBEC clarification No. F. No. BII/I/2000-TRU dated July 9, 2001.
The principal component of the rentals does not attract service
tax. It has been further clarified that no service tax is chargeable
in respect of lease and hire purchase agreements entered into
before July 16, 2001 if the property in the goods is also passed
before this date. Thus, continuing rentals in respect of such
agreements will not attract service tax. Interestingly, since
only finance leases are covered, operating leases do not fall
under the service tax net. In India, predominantly leases are
in the nature of finance leases, but operating leases are also
carried out in business like hiring of vehicles, aeroplanes and
decorative items, utensils etc. where a number of hirers use the
same
asset.
-
Credit card services
Service fees like joining fees, add-on card fee, late fees
and interest for use of credit facility in connection with transactions
with customers holding credit cards for purchase of goods and
services are chargeable to tax as stated in CBEC clarification
No. F. No. BII/I/2000-TRU dated July 9, 2001. As service fees
are chargeable only in respect of credit facility made available,
debit card charges are not covered under the tax net.
-
Merchant banking services
This category cover services like issue management, arranger
services, consultancy, advisory services in respect of securities
like bonds, shares, etc. Service fees for arranging loans and
deposits are not chargeable to Service tax as they are not in
the nature of securities.
-
Securities and foreign
exchange broking
Under this category brokerage received towards securities
and foreign exchange broking by a broker or middleman are covered.
Banks and other authorised foreign exchange dealers who merely
purchase and sell foreign exchange are not covered under this
category, as they do not act as brokers or middlemen. Also, banks
who avail of forex broking services provided by the Foreign Exchange
Dealers' Association of India (FEDAI) accredited FX brokers for
interbranch forex transactions are not covered under this category
as they are mere Authorised Dealers who do not provide forex broking
service as clarified by FEDAI.
An exception to the general rule that non body corporates are
not chargeable to service tax is found under this category as
a separate clause (b) is provided for which covers foreign exchange
broking provided by a foreign exchange broker. A foreign exchange
broker is broadly defined under section 65(46) to include any
Authorised Dealer of foreign exchange.
-
Asset management services
This category includes services provided by fund managers
for managing client funds typically asset management services,
custodial, depository and trust services. Cash management services
are exempt from levy of service tax. It has been clarified by
CBEC vide Circular No. 41/4/2002 dated March 15, 2002 that Chit
Fund companies are exempt as they carry out cash management services.
-
Advisory and other auxiliary
financial services
Investment services and portfolio research and advise, merger
and acquisition advise, corporate restructuring and strategy,
etc. are covered under this category. This definition is an inclusive
definition and should be widely interpreted.
-
Provision and transfer
of information and data processing
This head would cover banking and financial services through
the computer medium like internet banking services.
- Recommendations
A number of issues need to be addressed by the service tax authorities
to encourage the growth of the industry and remove the anomalies, which
hamper the smooth operation of business. The major concerns are given
below.
Exemptions
-
Finance and leasing hire purchase,
they are classified as sale under the Constitution of India and
consequently are subject to sales tax all over the country under
the State and Central Sales Tax laws. Sales tax incidence coupled
with service tax on the interest portion of the lease rentals
leads to a very high incidence of tax liability on leases and
hire purchase transactions which has almost heralded the death
knell for the industry.
-
The credit card industry today
is at a nascent stage in the country and the levy of service tax
discourages the use of credit card leading to encouragement of
cash transactions that develops a parallel economy in the country.
In fact, internationally some countries like Korea have provided
tax incentives to credit card users to pump more money in the
economy and discourage the grey market transactions. Hence, credit
cards should be excluded from the service tax net. Further, the
interest for utilisation of credit facility by the credit card
holder is not a service fee but in the nature of finance charge
for use of funds and should not be treated as service fee chargeable
to service tax.
-
Under the new category business
auxiliary services, information technology services are exempt
from service tax vide explanation to section 65 (19) of the Act.
A similar exemption should be extended for services falling under
the category of provision and transfer of information and data
processing to provide a level playing field for similar services
under different categories.
-
Blanket exemption from service
tax is allowed on services provided to developers/units in SEZs,
vide notification No. 17/2002-ST dated November 21, 2002. Similar
exemption should be allowed on services to infrastructure projects,
which are of vital national importance to develop the domestic
industry and attract foreign capital. It is pertinent to note
that section 10(23G) of the Income-tax Act, 1961, grants exemption
to lenders to infrastructure projects on interest, long term capital
gains, dividend and fee income arising due to long-term financing
to lower the cost of infrastructure projects.
-
Services to international organisations
are exempt from service tax under notification No. 16/2002-ST
dated August 2, 2002. Similarly services to national organisations
with social initiative agenda should be exempt from service tax.
-
There is no rationale for charging
service tax on services rendered to the Government, Central and
State, as well as RBI. This is so as service tax being an indirect
tax is recovered from the customer by the service provider and
thereafter deposited in the Government Treasury. Thus, the recovery
and payment of service tax is a transfer from one pocket of the
Government to the other, which should be exempt from service tax
in the absence of a revenue loss. Therefore, services granted
to Government or RBI should be exempt from service tax.
Addressal of administrative difficulties
-
As banks, FIs etc. could be chargeable
under more than one category under the Act, there would be practical
difficulties for the purposes of claiming input credit allowed
under the Act, as separate returns are required to be filed for
each category of chargeable services.
-
In respect of reimbursement of
expenses, not in the nature of service fees, a common circular
exempting service tax on reimbursements is required to be issued.
-
Provisions for filing of revised
returns and simplification of the complicated refund procedure
should be introduced.
- Conclusion
Addressing the concerns of service providers will go a long way
in streamlining the provisions and procedures under the Act.
|
