Banking & Other Financial Service

September 16, 2016   admin  Service Wise Implications
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The term “Banking and other financial services” has not been defined in Finance Act, 1994.  However, the service includes all the services which are provided in connection with banking companies, financial institutions including NBFCs, other body corporate, etc.

  • Important Definitions

As per Rule 2of Place of Provision of Service Rules, 2012, defines following terms as under:

(b)  “account” means an account bearing interest to the depositor, and includes a non-resident external account and a non-resident ordinary account;

(c) “banking company” has the meaning assigned to it in clause (a) of section 45A of the Reserve Bank of India Act, 1934 (2 of 1934);

(e)  “financial institution” has the meaning assigned to it in clause (c) of section 45-I of the Reserve Bank of India Act,1934 (2 of 1934);

(f)  “Non-Banking Financial Company” (NBFC) means:

  • a financial institution which is a company; or
  • a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; or
  • such other non-banking institution or class of such institutions, as the Reserve Bank of India may, with the previous approval of the Central Government and by notification in the Official Gazette specify.

  • Accounting Code

Such codes are no longer statutory but used for statistical purpose for the purpose of registration and for payment of tax as specified vide Circular No.165/16/2012 –ST dated 20.11.2012:

 

Tax Collection of Service Interest and penalties on such service
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  • 33.3.  Taxability of Certain Services under Banking and financial services

Certain services provided by this segment have been excluded from the definition of Service, which are as follows:

  • a transaction in money or actionable claim

However, it has been provided by way of an Explanation that transaction in money shall not include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged

Corporate Guarantee

In the case of Kaveri Agri Care Pvt. Ltd. v. C.S.T., Mysore reported in 2011 (22) S.T.R. 220 (Tri.-Bang.), Hon’ble Tribunal found considerable merit in the submission of the appellant that corporate guarantee provided to a bank for loans taken by another entity falls within Banking and Financial Services and not Business Support services.

However, In the case of Olam Agro India Ltd v CST, Delhi [2014 (33) S.T.R. 251 (Tri. – Del.)], while grating waiver from pre deposit, it was held that provision of corporate guarantee clearly falls outside banking or financial services and corporate guarantee does not fall within the ambit of bank guarantee.  Decision was upheld by Delhi High Court reported as 2014 (33) S.T.R. 234 (Del.).

  • 33.4.  Provision relating to Negative List

  • Clause (b) of section 66D of the Finance Act, 1994 specifies that services provided by the Reserve Bank of India are non-taxable services and clause (n) of section 66D specifies service by way of extending deposit, loans or advances where consideration is represented by way of interest or discount and sale or purchase of foreign currency between specified persons, as non-taxable.

  • 33.5. Provisions relating to exemptions

  1. General Exemption
  • Small Service Provider

Vide Notification No 33/2012-ST, dated 20.06.2012 – Exemption to Small service providers having taxable turnover of less than 10 Lakhs and providing services other than by way of under a brand name.

  • Import of Technology

Vide Notification No. 14/ 2012-ST, dated March 17, 2012 – Exemption in respect of Taxable service involving import of technology, from so much of service tax, as is equivalent to the extent of amount of R&D Cess payable on the said transfer of technology under the provisions of section 3 of the Research and Development Cess Act, 1986.

  • To Foreign Diplomatic missions and their personnel

Vide Notification No 27/2012-ST, dated 20.06.2012 – Exemption for all the taxable services provided by any person, for the official use of a foreign diplomatic mission or consular post in India, or for personal use or for the use of the family members of diplomatic agents or career consular officers posted therein.

  • Services by TBI or STEP

Vide Notification No 32/2012-ST, dated 20.06.2012 – All taxable services provided by TBI or STEP have been exempted

  • Services provided to SEZ

Vide Notification No 40/2012-ST, dated 20.06.2012, all taxable services received by a Unit located in a Special Economic Zone (SEZ) or Developer of SEZ for the authorized operations, has been exempted from the levy of whole of the service tax.

  1. Specific Exemptions:
  • Clause 29 of Notification No. 25/2012 dated 20-06-2012

Clause 29(g) of Notification No. 25/2012-ST grants exemption to services provided by business facilitator or a business correspondent to a banking company, in a rural area. However w.e.f 21-10-2015, clause 29 has been substituted and new clause reads as under:

“(g)  business facilitator or a business correspondent to a banking company with respect to Basic Savings Bank Deposit Account covered by Pradhan Mantri Jan Dhan Yojana in the banking company’s rural area branch, by way of account opening, cash deposits, cash withdrawals, obtaining e-life certificate, Aadhar seeding;”

Further, 2 new clauses has been inserted by Notification No. 20/2015 dated 21-10-2015 w.e.f. 21-10-2015 which provides for the following exemptions:

“(ga)any person as an intermediary to a business facilitator or a business correspondent with respect to services mentioned in clause (g);”

“(gb)business facilitator or a business correspondent to an insurance company in a rural area; or”

Further, para 2 of the said notification contains the following definitions-

“(i) “business facilitator or business correspondent” means an intermediary appointed under the business facilitator model or the business correspondent model by a banking company or an insurance company under the guidelines issued by Reserve Bank of India;

(g) “banking company” has the meaning assigned to it in clause (a) of section 45A of the Reserve Bank of India Act, 1934 (2 of 1934);

(zd) “rural area” means the area comprised in a village as defined in land revenue records, excluding-

the area under any municipal committee, municipal corporation, town area committee, cantonment board or notified area committee; or any area that may be notified as an urban area by the Central Government or a State Government;

  • 33.6. Provisions relating to Valuation and Abatement

  1. Section 67 read along with Service Tax (Determination of Value) Rules, 2006 provides the manner of determining the value of taxable services on which service tax should be levied.In respect of Banking and Financial services, specific provision for determination of taxable value has been provided under Rule 6(2)(iv) of Service Tax (Determination of Value) Rules, 2006. This rule lays down that the value of taxable services shall not include interest on loans.In terms of payment by an alternate rate, Rule 6 of Service Tax Rules, 1994 provides that a foreign exchange broker can pay Service Tax alternatively at following rates:(a)  0.12 [0.14 w.e.f. 01.06.2015] per cent of the gross amount of currency exchanged for an amount upto rupees 100,000, subject to the minimum amount of rupees 30[35 w.e.f. 01.06.2015];(b)  rupees 120 and 0.06 [140 and 0.07 w.e.f. 01.06.2015] per cent of the gross amount of currency exchanged for an amount of rupees exceeding rupees 100,000 and upto rupees 10,00,000; and(c)   rupees 660 and 0.012 [770 and 0.014 w.e.f. 01.06.2015] per cent of the gross amount of currency exchanged for an amount of rupees exceeding 10,00,000, subject to maximum amount of rupees 6000[7000 w.e.f. 01.06.2015]:Item No. 1 of Notification No. 26/2012-ST dated 20-6-2012 specifies abatement of 10% in respect of services in relation to financial leasing including hire purchase.

  • 33.7. Provisions relating to Cenvat Credit

  1. Clause (n) of section 66D specifies the services of providing loan or advance or deposit to customer as a non-taxable service. Therefore, any interest or discount earned on these activities would not be liable to service tax.Rule 6(3B) of Cenvat Credit Rules requires banks, etc. to reverse 50% of the credit on input and input services in that month-“(3B) Notwithstanding anything contained in sub-rules (1), (2) and (3), a banking company and a financial institution including a non-banking financial company engaged in providing services by way of extending deposits, loans or advances shall pay for every month an amount equal to fifty per cent of the Cenvat Credit availed on inputs and input services in that month”.Therefore, every banking company and a financial institution including a non-banking financial company who is earning interest/discount by extending deposit, loans or advances will be required to reverse 50% of the Cenvat Credit every month.

  • 33.8. Provisions relating to point of taxation

  1. The services listed in clause (b) and (n) of section 66D are not taxable. Therefore, the provisions relating to point of taxation for these services are irrelevant and for the services which are taxable, the point of taxation shall be determined by rule 3 of point of taxation rules, 2011.As per Rule 3 of Point of Taxation Rules, 2011, the point of taxation shall be-
    1. Time when the invoice for the service provided or to be provided is issued. As per Rule 4A of Service Tax Rules, invoice shall be issued within 45 days from the date of completion of service. In case invoice is not issued within 45 days from the completion of service, the point of taxation shall be the date of completion of service.
    2. In case where the person providing the service receives payment before the time specified above, the date of receipt of payment shall be the point of taxation.

    In the case of Banking services, the account of the customer is debited with the commission amount for services such as issuance of pay order, demand draft, transfer of money, issuance of cheque book, dishonouring of cheque, minimum balance charges, etc. The date of debit shall be considered as date of receipt of payment.

    Further, in respect of other services such as credit card renewal charges, loan processing charges etc. the bank will raise invoice for recovery of amount. The date of invoice will be considered as point of taxation.

  • 33.9. Provisions relating to Place of Provision of Service Rules, 2012

  1. The Place of Provision of Service Rules, 2012 contains different rules for different nature of services.  As per Rule 9 of Place of Provision Rules, 2012, in case of services provided by Banking company, or a financial institution, or NBFC, when provided to account holders, the place of provision shall be location of service provider.  i.e. if services are provided by Bank in taxable territory to any account holder, such services shall be taxable, if such bank is situated outside taxable territory, such services would be non taxable.  It is important to mention that if services are provided to account holders by a branch of an Indian Bank located outside taxable territory, place of provision shall be taken as outside taxable territory and thus, such services would be non taxable. Similarly, services of branch of a foreign bank to account holders in taxable territory would be taken as taxable under Finance Act, 1994.Banks offer the following services to account holders at their specified branches — multi-city / Payable at Par (PAP) cheque facility, anywhere banking facility, trade services, phone banking facility, internet banking facility, credit card, debit/ATM card, mobile banking and Real Time Gross Settlement (RTGS).  In recent times, certain value added services like SMS, Doorstep banking facilities are being offered by some of these banks to cater to convenience lifestyle of its customers.

  • 33.10. Provisions relating to reverse charge

  1. Banking and Financial services are not included under the mechanism of Reverse Charge. Hence, the person providing the service shall be the person liable to pay service tax.

  • 33.11. Important Case / References

    • In the case of Air India Charters Ltd. v. Commissioner (TAR), Service Tax [2013] 33 taxmann.com 218 (Mumbai – CESTAT), Assessee procured aircrafts under equipment lease financing for which payment was made to various entities abroad. Department demanded service tax on reverse charge basis on financial leasing under ‘Banking and Financial Services’. Assessee argued that aircrafts had been delivered abroad to its branches and, therefore, services were rendered outside India. It was held that even though aircrafts had been delivered abroad, since Air India is in travel business and aircrafts were used for flying from Indian destinations to foreign destinations and vice versa, prima facie, it was liable to pay service tax as it had paid service charges to foreign lessor. Thus, pre-deposit was ordered accordingly.
    • In the case of Union Bank of India v. Commissioner of Central Excise & Service Tax, Mumbai [2013] 31 taxmann.com 141 (Mumbai – CESTAT), it was held that a bank performing functions of RBI as an agent of RBI is eligible for exemption in respect of exemption to services provided by RBI under Notification No. 22/2006, dated 13-4-2006.
    • In the case of Karur Gayathri Finance Ltd. v. Commissioner of Central Excise, Trichy [2013] 33 taxmann.com 104 (Chennai – CESTAT), Assessee was engaged in advancing amounts to vehicle owners and recovering same by way of instalment. Department sought levy of service tax. But, it was held that in view of judgment in CCE v. Bajaj Auto Finance Ltd. [2008] 16 STT 474 (SC), activity of hire purchase finance is not covered under service tax levy under Banking and other Financial Services.
    • In the case of Coastal Gujarat Power Ltd. v. Commissioner of Service Tax, Mumbai [2013] 31 taxmann.com 92 (Mumbai – CESTAT), it was held that services received from International Finance Corporation and Asian Development Bank are not, prima facie, liable to service tax in view of overriding provisions of special laws governing such institutions.
    • In the case of Housing & Development Corporation Ltd. (HUDCO) v. Commissioner of Service tax, Ahmedabad [2012] 17 taxmann.com 14 (Ahd. – CESTAT), it was held that interest reset charges and pre-payment charges can be considered as cost incurred by borrower towards value added services like restructuring of loan, pre-payment of loan and same are liable to service tax under head ‘Banking and other financial service’.

  • 33.12. Related Circulars and Notification

      • Ministry’s letter F. No. BII/i/2000-TRU, dated 9-7-2001 – annexure vii- clarification regarding service tax on banking and other financial services
      • Circular no. 41/4/2002, dated 15-3-2002-clarification regarding liability of chit funds to service tax
      • Circular no. 50/11/2002-ST, dated 18-12-2002- levy of service tax on depository service under banking & other financial services
      • Circular no. 62/11/2003-S.T., dated 21-8-2003- scope of coverage of trading in foreign exchange
      • Paras 19.1 to 19.3 of Circular no. 80/10/2004-S.T., dated 17-9-2004- expansion of banking and other financial services
      • Circular no. 92/3/2007-ST, dated 12-3-2007- liability of money changers to pay service tax under banking & other financial service
      • Circular no. 83/1/2006-ST, dated 4-7-2006- services provided by department of posts not liable to service tax
      • Circular no. 94/5/2007-ST, dated 15-5-2007- applicability of service tax on entry and exit load charged by the mutual fund
      • Letter F. No. 137/ 57/2006-CX-4, dated 18-5-2007
      • Para 5 of Circular/letter D.O.F. No. 334/1/2008-TRU, dated 29-2-2008
      • Circular no. 96/7/2007-ST, dated 23-8-2007as amended by Circular no. 98/1/2008-ST, dated 4-1-2008, w.e.f. 4-1-2008
      • Relevant extracts of ministry’s Circular letter D.O.F. No. 334/13/2009-TRU, dated 6-7-2009
      • Letter no. Dof 334/3/2011-TRU, dated 28-2-2011 (annexure b)
      • Ministry’s Letter F. No. BII/I/2000-TRU, dated 9-7-2001 – Annexure VII

       As per section 65(10) of the Finance Act, 1994, “banking and financial services” means the following services provided by a banking company or a financial institution including a non-banking financial company, namely:—

      (i)    financial leasing services including equipment leasing and hire-purchase by a body corporate;

      (ii)   credit card services;

      (iii)  merchant banking services;

      (iv) securities and foreign exchange (for ex) broking;

      (v)  asset management including portfolio management, all forms of fund management, pension fund management, custodial depository and trust services, but does not include cash management;

      (vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisition and advice on corporate restructuring and strategy; and

      (vii) provision and transfer of information and data processing :

      1. The taxable service, as per section 65(72)(zm) means any service provided, to a customer, by a banking company or a financial institution including a non-banking financial company, in relation to banking and other financial services.
      2. The definitions of ‘banking’, ‘banking company’, ‘financial institution’ and ‘non-banking financial company’ as per the Banking Regulation Act, 1949and Reserve Bank of India Act, 1934 are given below:—

      “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and with drawable by cheque, draft, order or otherwise.

      “banking company” means any company which transacts the business of banking in India.

      “financial institution” means any non-banking institution which carries on as its business or part of its business any of the following activities, namely—

      (i)    the financing, whether by way of making loans or advances or otherwise, of any activity other than its own;

      (ii)   the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of like nature;

      (iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause (c) of section 2 of the Hire Purchase Act, 1972 (26 of 1972);

      (iv)  the carrying of any class of insurance business;

      (v)   managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto;

      (vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or otherwise, by way of subscription or by sale of units, or other instruments or in any other manner and awarding prizes or gifts whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person,

      but does not include any institution, which carries on as its principal business—

      (a)   agricultural operations; or (aa) industrial activity; or

      (b) purchase or sale of any goods (other than securities) or providing of any service; or

      (c)   the purchase, construction or sale of immovable property, so, however, that no portion of the income of the institution is derived from the financing of purchases, construction or sales of immovable property by other persons.

      “non-banking financial company” means—

      (i)    a financial institution which is a company;

      (ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;

      (iii)  such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by Notification in the Official Gazette, specify.

      1. Financial services covered under the tax net are specifically mentioned in the definition itself.

      2.1  Financial leasing including equipment leasing and hire purchase:

      2.1-1 In case of financial leasing including equipment leasing and hire-purchase, the service is taxable only if it is rendered by a body corporate. The term ‘body corporate’ has the meaning assigned to it in clause (7) of section 2 of the Companies Act, 1956. Briefly, body corporate means a private limited, public limited company or a Government company. Such companies should be either a banking company or a financial institution or non-banking financial company to come under the tax net. In other words individuals, proprietorship or partnership firms will not come under the tax net. The leasing or hire-purchase may be of motor vehicles, machinery and equipment or other goods.

      2.1-2 In the case of leasing or hire purchase, it is understood that the general business practice is as follows: The service provider enters into a leasing or hire-purchase agreement with the lessee or hire-purchaser. At the time of entering into the agreement, they collect a charge called lease management fee or processing fee or documentation charges or by any other name, which is usually a percentage of the transaction value. The lease rental or hire purchase amount is recovered in Equated Monthly Installments (EMI) over the period of lease or hire-purchase as indicated in the agreement through post-dated cheques and no separate bills are raised for the monthly recovery. Every agreement bears a unique number.

      2.1-3 The EMIs consist of recovery of principal amount (towards the original cost of the equipment) and finance/interest charges. The allocation between the principal and the finance/interest charges are known to and agreed upon by both the parties. The customer repayment schedule contains the details of the EMIs with the break up for the principal and the interest. In respect of leasing and hire-purchase, the amount recovered as principal is not the consideration for services rendered but is credited to the capital account of the lessor/hire purchase service provider. The interest/finance charges is the revenue or income and is credited to the revenue account. Such interest or finance charges together with the lease management fee/processing fee/documentation charges is the consideration for the services rendered and, therefore, they constitute the value of taxable service and service tax is payable on this value. Accordingly it is clarified that service tax in the case of financial leasing including equipment leasing and hire purchase will be leviable only on the lease management fee/processing fee/documentation charges (recovered at the time of entering into the agreement) and on the finance/interest charges (recovered in equated monthly installments) and not on the principal amount.

      2.1-4 A question has been raised whether lease or hire-purchase agreements entered into prior to the imposition of levy (prior to 16-7-2001) would be leviable to service tax. In this regard, it is clarified that such agreements entered into prior to 16-7-2001 will not be liable to service tax, provided the property/goods has also been received by the lessee prior to 16-7-2001.

      2.2 Credit card services

      2.2-1 This is a service where the customer is provided with credit facility for purchase of goods and services in shops, restaurants, hotels, railway bookings, petrol pumps, utility bill payments, etc. Cash advances are also permitted upto specified limits in most of the cases. This service is provided by nationalised banks, multinational banks and private banks.

      2.2-2 For rendering the service, the service provider collects joining fee, additional card fee, annual fee, replacement card fee, cash advance fee, charge slip/statement retrieval fee, surcharge/service charges on railway fare, fuel charges, and utility bill payments, charges on over limit accounts and late payment fee, interest on delayed payment, interest on revolving credit, etc. The fees may vary based on the type of card and from bank to bank. All these charges, including interest charges are made for the services rendered. Hence they all form part of the value of the taxable service in this case.

      2.2-3 The service tax is leviable only in respect of transactions which are done using a credit card on or after 16th July, 2001. Any amount paid by a customer to credit card service provider in respect of transaction done prior to 16th July, 2001 is not liable to service tax even though such amount is paid on or after the 16th July, 2001.

       

      Merchant banking services

      2.3 Banks and financial institutions including NBFCs providing merchant banking services are governed by the SEBI (Merchant Bankers) Rules, 1992 and SEBI (Merchant Bankers) Regulations, 1992. As per these rules and regulations, merchant banking service is any service provided in relation to issue management either by making arrangements regarding selling, buying or subscribing securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. This, inter alia, consists of preparation of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscription for debt/equity issue management and acting as advisor, consultant, co-manager, underwriter and portfolio manager. In addition, merchant banking services also include advisory services on corporate restructuring, debt or equity restructuring, loan restructuring, etc. The fee charged by the merchant banker for rendering these services will be the taxable value in respect of this service.

      2.4 Asset management including portfolio management and all forms of fund management, pension fund management, custodial depository and trust services.

      2.4-1 Asset management and portfolio managers are also governed by the SEBI (Portfolio Managers) Rules, 1993 and SEBI (Portfolio Managers) Regulations, 1993. As per these rules and regulations, the “portfolio manager” means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as discretionary manager or otherwise) the management or the administration of portfolio of securities or the funds of the client, as the case may be. They enter in agreement with the client and charge an agreed fee for providing the service. The tax will be leviable on the fee charged for providing these services. Similarly in the case of other types of fund management such as pension fund management, service tax will be leviable on the fee charged for providing the service.

      2.4-2 With respect to mutual funds, a question has been raised whether the asset management company is liable to pay service tax as it may not fall in the category of NBFC. It is clarified that such asset management companies are not NBFC. Hence they will not come under the purview of service tax.

      2.4-3 Custodial depository services means safe keeping of securities of a client and providing services incidental thereto, and includes—

      1. maintaining accounts of securities of a client;
      2. collecting the benefit of rights accruing to the client in respect of the securities;
      3. keeping the client informed of the action taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client; and
      4. maintaining and reconciling records of the services referred to in sub-clauses (a) to (c). Taxable value is the fee charged for providing custodial services. However, service tax will not be leviable on NSDL or CSDL fees paid to the depositories and recovered from the customers on actual basis.

      2.5 Other auxiliary financial services.

      2.5-1 Some examples of other auxiliary financial services are investment and portfolio research and advice, advice given on mergers and acquisition, advice on corporate restructuring and strategy, market analysis and intelligence.

      2.6 In the case of banks and financial institutions including NBFCs, while some services may be done in a centralised way (that is centralised billing and accounting) either at the head office or regional office, in respect of other services such as financial leasing including equipment leasing, specified branches may be providing the service with separate billing and accounting. In respect of a taxable service, where the billing and accounting is centralised in an office of the bank, only such office needs to be registered and made liable to pay service tax in respect of such service. Where the billing and accounting is not centralised and is undertaken by different branches of a bank or a financial institution including NBFCs, each such branch office will have to be registered and made responsible for payment of service tax and compliance with other procedural formalities.

      • Circular no. 41/4/2002, dated 15-3-2002-clarification regarding liability of chit funds to service tax 

      I am directed to say that doubts have been raised as to whether the services rendered by a chit fund is classifiable in the category of taxable service under “banking and other financial services”. As per section 65(10) of the Finance Act, 1994, “banking and other financial services” includes asset management including portfolio management, all forms of fund management, pension fund management, custodial depository and trust services, but does not include cash management, provided by a banking company or a financial institution including a non-banking financial company. The matter under consideration is as to whether the activity of chit funds falls in the category of fund management for the purposes of levy of the service tax on such activity.

      1. The matter has been examined by the Board in consultation with the Reserve Bank of India. The Reserve Bank of India has advised that the business of a chit fund is to mobilize cash from the subscribers and effectively cause movement of such cash to keep it working. Therefore the activity of chit funds is in the nature of cash management, which is specifically excluded from the scope of the “banking and other financial services” as defined under section 65(10) of the Finance Act, 1994.
      1. In view of facts mentioned above, it is clarified that “banking and other financial services” will not include the service rendered by chit funds. Accordingly, the service rendered by chit funds will not fall in the category of taxable service as defined in section 65(72)(zm) of the Finance Act, 1994.
      • Circular no. 50/11/2002-ST, dated 18-12-2002

      I am directed to say that doubts have been raised as to whether Service Tax is payable on the services rendered by Central Depository Services (India) Limited (CDSL). CDSL is providing depository services in respect of DEMAT stocks to its customers. It has also implemented “Electronic Access to Securities Information” (easi), to enable the owner to access accounts in the first phase and transact depository business in the second phase of the project. CSDL charges certain fee such as registration fee, annual fee etc. for providing service of easi.

      1. A clarification has been sought in regard to applicability of service tax levy on the service of ‘easi’, in view of clarification issued vide F. No. B-11/1/2001-TRU, dated 9-7-2001 that e-commerce would not be liable to service tax under the category of “online information and data base access and/or retrieval service”.
      1. The matter has been examined in the Board. Instructions issued vide F. No. B-11/1/2001-TRU, dated 9-7-2001 had clarified in Annexure IV that in e-commerce transactions, no service of online information and data base access/retrieval was involved and therefore, e-commerce transactions would not, ordinarily, be covered under the service tax net

      However, this clarification is not applicable to services covered under other taxable services including “banking and other financial services” which are provided through Internet.

      1. Service tax has been imposed on ‘banking and other financial services’ with effect from 16-7-2001. Depository service is one of the services covered under the category of ‘banking and other financial services.’ The definition of ‘Banking and other financial services’ as given in section 65 of the Finance Act, 1994includes “provision and transfer of information and data processing”. “Banking and other financial services” and “on line information and data base access and/or retrieval service” are two distinct taxable services having distinct coverage. The service of ‘easi’ provided by CDSL is a part and parcel of depository service and hence covered under the category of “banking and other financial services”. They are liable to pay service tax on all depository service even if service is provided through Internet.
      • Circular no. 62/11/2003-S.T., dated 21-8-2003

      With regard to services provided by money changers, a doubt has been raised whether all trading in foreign exchange will be chargeable to service tax

      Prior to 1-7-2003 the service of “securities and foreign exchange (for ex) broking”, when provided by banking company/financial institution/body corporate was liable to service tax. Through Finance Act, 2003“foreign exchange broking” when provided by foreign exchange brokers, other than banking company/financial institution/body corporate, were also brought under the tax net w.e.f. 1-7-2003. As per the definition in law foreign exchange brokers include authorised dealers of foreign exchange. Authorised dealer of foreign exchange has been assigned the meaning of “authorised person” under the FEMA, 1999. Accordingly, authorized dealers/money changer, etc., which are authorised to deal in foreign exchange are covered in the definition of “foreign exchange brokers” under service tax provisions. However, as explained above only the service of “foreign exchange broking” when provided by foreign exchange brokers (other than banking company/financial institution/body corporate which are already covered) has been brought under the tax net.

      • Circular no. 80/10/2004-S.T., dated 17-9-2004(relevant extract)

      19.1 The existing taxable service, i.e., ‘banking and other financial services’, has been expanded both in terms of its coverage and the types of service providers. Financial services would now also include specified financial services, namely, lending, issue of pay order, demand draft, cheque, letter of credit, bill of exchange, providing a bank guarantee, overdraft facility, bill discounting, safe deposit lockers, or safe vaults and operation of bank accounts. The interest amount would, however, remain excluded from the purview of service tax. In addition to banking company, financial institution including a non-banking financing company, body corporate and any other commercial concern providing financial services will also be covered.

      19.2 The ‘interest on loans’ has been specifically excluded by way of amendment to the provisions relating to valuation (S. 67). All such interests that are in the nature of interests on loans would thus remain excluded from taxable value. Further clarifications on these issues would be issued shortly.

      19.3 Collection and other bank charges in relation to taxes/duties collected on behalf of the Union/State Governments and Union Territories have been exempted from service tax. (Refer Notification no.13/2004-ST, dated 10-9-2004.

      • Circular No. 92/3/2007-ST, dated 12-3-2007

      Service tax is leviable on foreign exchange (for ex) broking service under the category of ‘banking and other financial service’. In terms of the provisions of the Finance Act, 1994, foreign exchange broker includes a money changer (authorized dealer of foreign exchange). In this context, a question has arisen as to whether the service provided by a money changer in relation o exchange of foreign currency is a for ex broking service for applicability of service tax levy under ‘banking and other financial services’.

      1. The issue has been examined by the Board. It was noted that ‘money changing’ and ‘foreign exchange broking’ are two different activities. Money changing is an activity of sale and purchase of foreign exchange at the prevalent market rates. On the other hand, foreign exchange broking is the activity performed as an intermediary, on a commission/brokerage basis, for facilitating the clients who wish to buy or sell foreign exchange. The foreign exchange broker providing foreign exchange broking service does not hold title to the foreign exchange. Accordingly, Board is of the view that service tax is not leviable on money changing per se, as such activity does not fall under the category of foreign exchange broking.
      1. The instruction issued earlier videMinistry’s Letter F. No. 341/44/2005-TRU, dated 6-10-2005(Annex A) stands superseded. Annex A Letter F. No. 341/44/2005-TRU, dated 6-10-2005, Government of India, Ministry of Finance, Department of Revenue, Tax Research Unit
      1. On perusal of the statutory provisions regarding taxation of services provided in relation to foreign exchange broking it is seen that :
      • Authorized dealers of foreign exchange are defined under section 65(8) of the Finance Act, 1994. According to this section, authorized dealers are all persons authorized under clause 2(c) of Foreign Exchange Management Act, 1999(FEMA).
      • All money changers are authorized persons in terms of clause 2(c) of Foreign Exchange Management Act, 1999 (FEMA).
      • Therefore all money changers are authorized dealers of foreign exchange under section65(8) of the Finance Act for the purpose of service tax levy.
      • Authorized dealers of foreign exchange under section 65(8) are included under the category of foreign exchange brokers defined under section 65(46) of the Finance Act, 1994.
      • Thus all money changers are foreign exchange brokers and are leviable to Service Tax under section 65(12A) or 65(12b) depending on their constitution.
      1. All money changers under section 2(c) of FEMA are foreign exchange brokers as inferred from above. Therefore any service provided by such money changers would amount to foreign exchange broking. Money changers are licensed by the Reserve Bank of India in terms of section10(1) of FEMA, 1999.
      2. The following points which govern the relationship between RBI and the money changers are relevant:
      • Money changers are licensed by the RBI for the purpose of undertaking activities covered under section 10(1) of FEMA, 1999.
      • Their activity of dealing in foreign currency is subject to conditions imposed by RBI. In terms of Para 1.7 of the Exchange Control Manual, RBI may revoke the licence/authorization granted by it to a money-changer at any time if the holder of the licence/authorization is found to have failed to comply with any condition subject to which it was granted or to have contravened any provisions of FERA, 1973 or of any Rule, Notification, Direction or order made there under.

      Thus, it is clear that money changers are only dealing in foreign currency as agents/licensees of RBI.

      1. 4. Service tax on foreign exchange broking services is applicable to services provided by any foreign exchange broker including banking company, financial institution, non-banking finance company anybody corporate, or commercial concern. Statutory provisions are the same in respect of all these entities, which are engaged in the same activity. Money changers cannot go out of the purview of service tax on the plea that they are merely selling and purchasing foreign currency and not dealing or brokering in foreign exchange. Under Sale of Goods Act, Goods means every kind of movable property but excludes money. Therefore transactions in foreign exchange do not fall under scope of sale.
      1. In view of the statutory provisions, the services provided by money changers in relation to foreign exchange is covered under banking and financial services as defined under section65(12) of the Finance Act and leviable to service tax under section 65(105)(zm) or section65(105)(zzk) of the Finance Act, 1994.
      • Circular no. 83/1/2006-ST, dated 4-7-2006

      I am directed to say that the scope of levy of service tax on ‘banking and other financial services’ defined under section 65(12) of the Finance Act, 1994 and classifiable as taxable service under section 65(105)(zm) of the Finance Act, 1994 has been examined in the context of certain services provided by the Department of Posts.

      1. The issue is whether or not services such as money orders, operation of bank accounts, issue of postal orders provided by Department of Posts are liable to service tax under section 65(12), read with section 65(105)(zm) of the Finance Act, 1994, as amended.
      1. Banking and other financial services are defined under section 65(12). Such services 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 to a customer are liable to service tax under section 65(105)(zm). The expression ‘any other person’ appearing in section 65(105)(zm)is to be read ejusdem generis with the preceding words. The expression ‘other financial services’ appearing under section 65(12)(a)(ix) is a residuary entry and includes those services which are normally rendered by banks or financial institutions.
      1. 4. Hence, banking and other financial services provided by a banking company or a financial institution or a non-banking financial company or any other service provider similar to a bank or a financial institution are liable to service tax under section 65(105)(zm) of the Finance Act,1994. Department of Posts is not similar to a bank or a financial institution and hence does not fall within the category of any other similar service provider.
      1. In view of the foregoing, it is clarified that services such as transfer of money through money orders, operation of savings accounts, issue of postal orders provided by the Department of Posts are not liable to service tax under section 65(105)(zm) read with section 65(12) of the Finance Act, 1994.
      • Circular NO. 94/5/2007-ST, DATED 15-5-2007

      Service tax is leviable on ‘asset management and all other forms of fund management’ under the category of ‘banking and other financial service’. In this context a question has arisen as to whether the service tax would be chargeable on the ‘entry and exit load’ amount charged by a mutual fund to the investor.

      1. The issue has been examined by the Board. ‘Mutual Fund’ statutorily means a fund established in the form of a trust to raise money through sale of units to the public for investing in securities including money market instrument. Thus, a mutual fund is a collective pool of money created by subscription of its units by the investors. The objective of a mutual fund is to achieve financial goal of maximizing the return for subscribers, by investing the money efficiently and effectively in the securities and other such instruments using the service of a professional fund manager, i.e., an asset management company (AMC).
      1. In operating the scheme, the following expenses are incurred by the mutual fund,—

      (i) Initial issue expenses – These expenses are incurred on initial brochures, SEBI approvals, advertisement, registrars, preparation of certificate, postage, distribution and broker, etc.

      (ii) The recurring expenses – These expenses are incurred on fund management fee to Asset Management Company, brokerage, trustees fee, expenses on account of stationery, postages, advertisements, listing on exchanges, publishing of Net Asset Value (NAV), distribution charges, custodian charges, audit fee, etc.

      1. In terms of the Tenth Schedule to the SEBI (Mutual Fund) Regulation, 1996, the initial issue expenses are amortized over a period of the scheme, and the entry and exit load charges are paid by the investors to the fund to meet these expenses. Any unamortized portion of expenses is included in calculation of NAV. Hence, entry and exit load charges are not towards fund management service provided by the AMC but to meet the initial issue expense and other specified expenses, incurred by the mutual fund. It is accordingly clarified that “entry and exit load” charged by mutual fund would not attract service tax levy under the category of fund management service.
      1. In a mutual fund, fund management activity is undertaken by an asset management company(AMC) right from the stage of inception of mutual fund. For its services of fund/asset management, (i.e., a periodic/recurring fee) an AMC charges the mutual fund an ‘investment and advisory fee’, in accordance with provisions contained in the SEBI regulation. This fee is chargeable to service tax under ‘fund management service’. Similarly, service provided by the distributors/selling agents, brokers, custodians, trustees etc., to the fund, is also taxable under respective taxable service such as business auxiliary service, stock broking service and banking& other financial services.
      • Letter F. No. 137/ 57/2006-CX-4, Dated 18-5-2007

      Please refer to your letters F. No.171/ DGCEI/ST/INT/57/2006, dated 16-11-2006, F. No.171/DGCEI/MZU/1 and ISD/12(1)/37/5, dated 29-9-2006, F. No. 171/DGCEI/ST/INT/ 83/2005, dated 11-10-2006, F. No. 171/DGCEI/ST/INT/47/2006, dated 25-11-2006 on the above subject.

      1. 2. The stock exchanges like National Stock Exchanges (NSE)/Bombay Stock Exchanges (BSE)provide electronic platform and other related services to facilitate and carry on trading shares, stocks, debentures, bonds and commodity etc. and to initiate, facilitate, promote, assiST, undertake manage all activities in relation to trading in securities, other instruments and commodities. The clearing houses associated with these exchanges, e. National Securities Clearing Corporation Limited (NSCCL) and M/s Bank of India Shareholding (BOISL) provide service of clearing and settlement of stocks, which includes validating the transactions; keeping account of buying and selling of stock; maintaining payment details against buying and selling; debiting and crediting the customer’s accounts and providing guarantees to the parties (i.e. brokers or investors) settlement of transaction. In case of trade in Government securities, treasury bill, guaranteed securities, bonds, units, deposits, certificates, notes, warrants and other securities of all kind on Negotiated Dealing System (NDS), the electronic platform of RBI, clearing and settlement is done by Clearing Corporation of India Ltd. (CCIL). Similarly, National Commodities & Derivatives Exchanges (NCDEX) and Multi Commodity Exchanges of India(MCX) provide electronic platform and other related services for trading in commodities. Further, commodity exchanges are also providing services of clearing and settlement of trade executed through them.
      1. The Board has examined the issue of leviability of service tax on services provided by the Stock and Commodity Exchanges and Corresponding Clearing and Settlement Organisations, under the category of ‘provision and transfer of information and data processing (under Banking and other Financial Services)’, ‘Business auxiliary services on-line information and database access or retrieval services’ and ‘club and association service’.
      1. The Board is of the view that the activities of the exchanges and their clearing houses as mentioned above cannot be simply called the ‘online information and database access retrieval service’ or ‘provision and transfer of information and data processing’. While it is true that the Exchanges/clearing houses do process, exchanges/transfer and provide online data during the course of their business, the same is (i) only incidental to ensure transaction of stocks/commodities and their settlement, and is not the principal service provided by theExchanges and their clearing houses (ii) no separate charges are collected for information and data processing or access/retrieval by the Exchanges/clearing houses during the course of such trading. The transaction charges collected by the Exchanges are based on the quantum (in money value) of transaction in stock or commodity, as the case may be, and not on the volume of data interchanged/accessed retrieved. Similarly, these services do not fall under the business auxiliary service, as these are not performed on behalf of any other person. These services would also not fall under the category of services provided by ‘clubs and associations’ as the Exchanges and clearing houses are corporate bodies which provide service to investor through a registered member as against to its own members. Thus, though the above stated activities of the Exchanges/clearing houses are in the nature of ‘services’, they do not fall under the category of any of the existing taxable services.
      1. However, if service of ‘online information’ is provided by exchange on payment basis to, say, market reporting agency or any other person (i.e. television channels), the same is liable to service tax.
      1. The pending issue may be decided on the aforesaid basis.
      • Circular/letter D.O.F. no. 334/1/2008-TRU, dated 29-2-2008
      1. Scope Of Specified Taxable Services Is Being Amended As Follows:

      5.1 Foreign Exchange Broker Service:

      5.1.1 Foreign Exchange (Forex) broking service is leviable to service tax. Foreign exchange brokers provide services as an intermediary in relation to purchase or sale of foreign currency on a commission/brokerage basis. Purchase or sale of foreign currency is undertaken by foreign exchange broker and also by persons authorised under Foreign Exchange Management Act, 1999to deal in foreign exchange and having licence issued by RBI. Such authorised persons are known as money changers or authorised dealers of foreign exchange. Services in relation to purchase or sale of foreign currency is, therefore, provided by foreign exchange broker, moneychanger and also authorised dealer of foreign exchange.

      5.1.2 Foreign exchange broker indicates the consideration for the services provided (commission)explicitly. Whereas money changers/authorised dealers of foreign exchange providing same services may not necessarily indicate the consideration explicitly.

      5.1.3 Section 65(12) is being amended so as to levy service tax on purchase or sale of foreign currency, including money changing, provided by an authorized dealer in foreign currency or an authorised money changer, in addition to a foreign exchange broker. An Explanation is being added to the effect that explicit mention of the consideration for the services provided in relation to purchase or sale of foreign currency is not relevant for the purpose of levy of service tax. Taxable services [section 65(105)(zzk) and 65(105)(zm)] are being amended suitably. With these amendments, services provided in relation to purchase or sale of foreign currency by a foreign exchange broker, money changer and authorised dealer of foreign exchange shall also be leviable to service tax.

      5.1.4 To enable determination of taxable value, where the consideration for the services provided in relation to purchase or sale of foreign currency is not explicitly indicated by the service provider, a method under rule 6(7B) of the Service Tax Rules, 1994 shall be prescribed. As per this provision, the service provider has the option to pay service tax calculated at the rate of0.25% of the gross amount of currency exchanged.

      Illustration:

      Buying rate : US$ 1 = Rs. 38//Selling rate : US$ 1= Rs. 40

      (i)Purchase of US$ 100 by the service provider:

      Gross amount of currency exchanged in rupees= Rs. 3800 (Rs. 38 × 100)

      Service tax payable = Rs. 9.5 (0.25% × 3800)

      (ii)Sale of US$ 100 by the service provider:

      Gross amount of currency exchanged in rupees= Rs. 4000 (Rs. 40 × 100)

      Service tax payable = Rs. 10 (0.25% × 4000)

      • Circular No. 96/7/2007-ST, dated 23-8-2007 as amended by Circular no. 98/1/2008-ST, dated 4-1-2008, w.e.f. 4-1-2008
      Reference CodeIssue
      -1-2
      034.01/23.08.07Money changers are persons authorized under section 7 of Foreign Exchange Management Act, 1973 to deal in foreign currency. Explanation given under section 7 of the said Act states that ‘dealing’ means purchasing foreign currency in the form of notes, coins or traveller’s cheques or selling foreign currency in the form of notes, coins or traveller’s cheques.
      Whether services provided by a money changer in relation to dealing of foreign currency (buying or selling), at specified rates, it out separately charging any amount as commission for such dealing, is liable to service tax as foreign exchange broking under‘ banking and other financial services’ [section 65(105)(zm)]?
      034.02/23.08.07Asset management and altogether forms of fund management’ are liable to service tax under ‘banking and other financial service’
      [section 65(12)].
      Whether the amount charged as ‘entry and exit load’ from the investor by a mutual fund is liable to service tax as asset/fund management services under banking and other financial services[section 65(105)(zm)]?
      034.03/23.08.07Whether depository services and Electronic Access to Securities Information (EASI)services provided by Central Depository Services (India)Ltd., (CDSL) is liable to service tax under Banking and other Financial Services[section 65(105)(zm)]?
      034.04/23.08.07Services provided by banking company or a financial institution including anon-banking financial company or any other body corporate or commercial concern in relation to asset management including portfolio management, and all forms of fund management, is leviable to service tax under“ banking and other financial services” [section65(105)(zm) and section65(12)]. The said taxable service also includes cash management services provided.
      Services are provided in relation to chit funds. Chit Funds are of two types, namely:—
      (a) Simple Chit Funds: In this case, members agree to contribute to the fund a certain amount at regular interval. Lots are drawn periodically and the member, whose name appears, gets the periodical collection. No separate amount is charged from the members.
      (b) Business Chit Funds: In this case, there is a promoter known as foreman who draws up the terms and conditions of the scheme and enrolls subscribers. Every subscriber has to pay his subscription in regular installments. The foreman charges a separate amount for the services provided. Some States prescribe a ceiling limit for the amount to be charged by such promoter for the services provided. Commission amount is retained by the promoter as consideration for providing the services in relation to chit fund.
      Whether services provided in relation to chit fund is leviable to service tax under“ banking and other financial services” or not?
      • Ministry’s Circular Letter D.O.F. No. 334/13/2009-Tru, dated 6-7-2009

      6.2 Sale and purchase of foreign exchange/money changing were made taxable in the past. The inter-bank transactions of purchase or sale of foreign currency, when undertaken by scheduled banks, is being exempted. (Notification No 19/2009-ST, dated 07.07.2009 refers). Scheduled banks under this Notification mean the banks, which are included in the Second Schedule of the Reserve Bank of India Act, 1934.

      • Letter No. DOF 334/3/2011-TRU, dated 28-2-2011 (Annexure B)
      1. Money changing services

      (a)   A new rule 2B has been introduced in the Service Tax (Determination of Value) Rules, 2006 prescribing the value of the service in terms of section 67 of the Act. The value shall be as follows:

      (i)    The difference between the buying rate or the selling rate, as the case may be, and the RBI reference rate for that currency for that day multiplied by units of currency exchanged;

      (ii)   If RBI reference rate is not available the value shall be 1% of the value of money exchanged in Indian rupees;

      (iii)  When both the currencies are not Indian rupees, 1% of the lesser of the amounts receivable if the two currencies are converted at RBI reference rate.

      (b)    The rate of composition under rule 6(7B) has been lowered from 0.25% to 0.1% of the gross amount of money exchanged. However, the proviso relating to paying tax on billed charges has been deleted. Thus now the assessee will have the option to pay tax @0.1% of gross amount exchanged or else at standard rated on the value of service in terms of rule 2B,as mentioned above.

 

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