All the banks engaged in lending of money is facing an issue relating to applicability of Service Tax on fore-closure / pre-closure charged towards pre-payment of loan amount.

In several cases, department has issued show cause notices and in some cases, the matter is still pending before CESTAT for final decision.

In the meantime, department has issued a clarification that, fore-closure charges received by the banks / financial institutions can not be treated as interest and therefore, liable to service tax.

See. F No 345/6/2008-TRU dated 11-6-2008.

Service tax on pre closure charges treated as taxable service, exposing lenders to assessment and compliance risk. Applicability of service tax to pre closure or fore closure charges is contested: revenue authorities treat such charges as not being interest but as consideration for a taxable service, leading to show cause notices and appeals; a departmental clarification affirms that fore closure/pre closure charges are liable to service tax, exposing lenders to assessment and classification risk.