Explicit and Implicit charges

Financial services are commonly understood as the money management services. Various institutions like banks, insurance. Financial companies etc are involved in providing financial facilities to the people in general. The charges charged by the financial companies are sometimes in the form of explicit fees and sometimes in the form of implicit fees.

Explicit fees are the charges stated and specifically charged by the institutions as processing charges, documentation charges, account opening charges, investigation charges, cheque book issue charges etc.

Implicit fees are the charges in the form of hidden charges that are not specifically charged. Banks are required to maintain certain bank balance in the account of the customers. Nominal rate of interest is paid on such balances. The customer could have earned higher rate of interest on this amount had he invested the same anywhere else. Thus the difference between the opportunity rate of interest and the actual rate of interest paid by the institutions are the implicit fees.

The financial services cannot be taxed to VAT. Since it provides services as mentioned above hence service tax is levied on the services provided. Further, service tax can only be charged on the explicit fees being the same can be calculated and specifically charged from the customers. However, in case of implicit fees the exact amount of services charge could not be identified, thus implicit charges are out of the purview of service tax net. GST may also continue the same.

Hope the information will assist you in professional endeavors.

CA Akash Phophalia

Chartered Accountant

(BCOM (HONS), MCOM (FandT), CS, DISA, Certified Indirect Taxation of ICAI)

Office No 203, Amrit Kalash,

Residency Road, Near Bombay Motor Circle

Jodhpur – 342001

Rajasthan

0291-2640225, 9799569294

The contents are for informational purpose and no where constitutes professional advice or recommendation.