Standard Chartered Bank Credit Card — Service tax wrongly charged by Banks on interest/finance charges relating to delayed credit card payments

It has come to my notice that several banks are charging service tax on interest and finance charges on credit card payments. In certain cases although the nomenclature is clearly mentioned as “Interest” still the bank has charged service tax..In my case as I happen to practise in this area, I protested to two banks namely HDFC Bank and Standard Charetered Bank and both these bank's charge service tax on Interest/ Finance charges and also maintain that what they are doing is correct.
I think this situation needs immediate correction. The crux of the matter is that most Banks have an unwritten policy to charge service tax on almost all services which they provide probably to be on the safe side to avoid entering into litigation with the department. They end up charging the customer, the common man who rarely has the time or in most cases the know-how to question these charges and when someone questions the charge they hastily refund the amount.
I emailed the abovementioned banks saying that charging service tax on interest/ finance charges is not in order and the replies received from these banks were unsatisfactory and virtually stated that these charges are done as per the “Service Tax Provisions” none of which was quoted in the letter.

To clarify the position as per Service tax law, the relevant provisions are listed as follows:
 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. The basic element of taxability under this head is that the transaction should amount to “Service”, which is not satisfied in the case of Interest charged on delayed payments.
 There is another head which is relevant to this discussion i.e. "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.
 Any loan given by a bank, even though it is a short term loan under a credit card is lending by a bank and as such this service will be more appropriately be covered under the head "Banking and other Financial Services".
 Finally, for calculating the taxable value of the services, as per clause ( iv ) 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.
Service tax can only be charged on the amounts collected as their charges for providing the loan , under heads such as `administrative expenses', `commissions', `service charges', processing fees etc.
I feel this situation needs to be addressed and corrected and someone needs to start the process and hence this article so that when you are making your credit card payments please make sure that you are not paying service tax on interest charged on delayed payments.
I am forwarding this complaint to you so that you can kindly look into this matter to get the situation corrected, so that the common man does not end up paying amounts which are not due to the government.
K C Seetharaman FCA DISA (ICA)
Chartered Accountant
Ananthan & Sundaram CA’s
1st Floor, Saarathy Enclave,
Cheruparambath 1st Cross Road
Kadavanthara
Kochi - 682020
Email:[protected]@gmail.com