Service tax on credit card, finance charge.

[CASeetharaman KC]

I find that service tax is being charged on interest on credit card payments by banks. In my opinion there is no element of service involved in Finance charges or interest charged on credit card payments. If there were to be correct then banks should be charging service tax on interest charged on loans. There seems to be a serious problem somewhere and it seems these organisations are playing it safe by charging service tax on interest and finance charges, whereas the customer ends up payings these charges without questioning it. I have my own case where I wrote to HDFC Bank who had charges service tax on interest charged on delayed payments. They claim that service tax is being charged as per Government of India Guidelines. I am truly not aware of any such guidelines where the Government has mentioned anything about collecting service tax on interest charged. Please guide me appropriately if I am wrong

[SANJEEV JADHAV]

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. There is also the "banking and other financial services". As per Section 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. If loan has been given by the bank, though on the basis of a card, this service will be more appropriately covered by the "banking and other financial services". However, for calculating the taxable value of the services, as per 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. The bank can only charge service tax on the amount it collects from you for providing this loan service, under heads such as `administrative expenses', `commissions', `service charges', etc.

[Surender Gupta]

I agree with the view of Mr. Sanjeev Jadhav, banks should not charge service tax on interest portion as long as the basic amount is in the nature of loan.

[SHYAM SHARMA]

Dear Seetharaman Ji,

I have also raised the same question to HDFC Bank in respect of my card and got the similiar reply. Infact, I complained to the office of banking ombudsman. My query has been closed as HDFC bank representative has replied that since bank provides service of empowering the customer to effect various transactions, levy of "finance charges" also forms part of that service and hence service tax on the same is manadatory! They have also mailed me the text which enlists all types of services (in relation to credit card) on which service tax applies under section (33a) of section 65 of the act. However, it is not specifically mentioned in their text that service tax is leviable on finance charges.

 

I am not convinced with their reply and need some guidance of experts in this field. Kindly help.

 

AI Summary

Service tax on credit card finance charges: interest excluded from taxable value but fees and service charges may remain taxable.
Credit card and banking services may be taxable, but rules exclude plain interest charged on loans from the taxable value; therefore interest or finance charges that constitute lending costs should not be included in service tax valuation, whereas administrative fees, commissions and other service charges for providing card services remain taxable.