Credit cards and service tax

Article by Shri Seetharaman K.C.

In the article by Shri Seetharaman K.C. titled Service Tax charged by Banks on Interest/ Finance Charges charged on delayed Credit Card Paymentslearned author has rightly pointed out that credit card service providers are wrongly charging service tax on many of charges which are not subject to levy of service tax.

Reversal of charge and ST:

Credit card issuers many time reverse late payment charge, finance charges when an objection is raised by credit card holder. This is because many times  the charge is levied due to delay in collection by card issuer. When the charge itself is reversed, the corresponding service tax is also reversed as a consequence. However, when a late payment charge or financial charge is levied, most of credit card issuers are charging service tax, in case there is no reversal then service tax remain levied, though wrongly.

Reliance of old circular by card issuers:

Factually the credit card issuers are charging St based on old circular , which is no longer valid after amendment of provisions by way of  Valuation Rules for levy of service tax.
There should not be service tax on many items:

There should not be service tax on various items of charges which are not for any service rendered. Like late payment charges and interest or finance charges. These charges are compensatory or penal nature charges and not for any service rendered by the card issuer. Therefore, service tax should not be charged where:

No service is provided- e.g. cheque bouncing charges - which is in nature of damages.

Charge is in nature of interest on loans - cash withdrawals charges, payment to merchants, balance transfer charges in nature of interest, overdue payments charges etc.

Interest for late payment.

Prepayment charges for early payment of any loan taken on or through credit card element of interest or commitment charges in annual fees of credit card.

Credit Card old and new provision:

Earlier services relating to credit cards were included in the services of a banking company and financial institution including NBFC (Non-Banking Financial Company) and as per then prevailing circular credit card issuers started to levy service tax on almost all charges. And they are still continuing to burden card holders with the same.

Whether, the circular dt. 09.07.2001 is contrary to S.67 of the F.A. 1994 ?:

The credit card issuers are relying on Circular dt. 09.07.2001 for levying service tax on finance charges, late payment charges etc.

As per S.67 of the F.A. 1994 interest on loan is not to be included in taxable value of services rendered. Therefore, the above circular was clearly contrary to the provision of S.67 of the F.A. regarding interest and no service items, hence to that extent the circular was invalid being ultra virse to the main enactment, however, no one challenged circular, the card issuers collected ST and deposited.

New provision:

As per clause (iv) Rule 6(2) of Service Tax (Determination of Value) Rules 2006, any 'interest' charged on the loans is not includible in value of taxable service.
This Rule is applicable to all service provider and not to any specific category of service provider. Credit cards are usually issued by bank or a SPV of bank which is NBFC. The exemption provided in the Rules are applicable to all service providers.

Unfortunately credit card issuers are still relying on old circular which itself was wrong an invalid on this aspect. Even after coming into force of valuation Rules, the banks and other credit card issuers are still charging service tax on many items of charges which should not be burdened with ST.

Credit card issuers are relying on play safe policy as they can easily collect service tax from card users.
A strong protest by credit card users is desirable however the problem is that most of card users who can capable to protest are extremely busy persons and others who avail lower credit limits have no means to protest. For this reason, credit card issuers are illegally collecting service tax on many items.

The credit card issuer must consider this problem from marketing point of view, due to levy of service tax loans or other credit facility through credit card the cost of finance goes up and if service tax is not levied then cost of finance will be reduced and better marketing of loans can take place.

Circular is desirable:

Credit card is also used by general public, therefore a clarification in form of circular is also desirable.