Credit Card - Service Tax on interest portion? - Payable - Board confirms
AS per Rule 6(2)(iv) of the 'Service Tax (Determination of Value) Rules, 2006', the value of any taxable service, does not include interest on delayed payment of any consideration for the provision of services or sale of property, whether moveable or immoveable.
A netizen, who is a credit card holder opted for converting his outstanding amount to EMIs in response to the scheme offered by the Bank. After noticing that the Bank had collected Service Tax also on the interest portion of the EMIs, he approached the Bank, as according to his understanding Service Tax is applicable only on the processing fee/conversion fee but not on the interest part, because in respect of loans, interest charged is not taxable.
The Bank replied:
We have now been directed by the tax authorities, to be in line with the industry practice of levying service tax on the interest portion of the EMI amount on a credit card and hence, effective Nov, 16 statement, service tax would be applicable on all the interest portion of the ongoing EMIs as well.
Our netizen wanted to get a clarification from the TRU. He lodged a complaint with the CBEC and got the following reply with the remark "Case closed"
Issue is covered by education guide issued in July, 2012 as under:
In case of a credit card, issuing entity allows the facility of payment of the purchases made by the card holder within a specified period failing which some charges are levied. In the case of credit cards the credit extended is not for the delayed payment of consideration for the provision of services. The services in the case of the credit card are by way of levy of issuing charges or the commission charged from merchants etc. The interest in this case is not for the consideration for the use of the card. Thus the benefit under the valuation rules will not be available to credit card companies. The question is whether such credit extended will amount to loans or advances. Loans and advances are meant to signify amounts contractually negotiated as such (loan or advance) and not merely failure to pay an amount at the due date. The exorbitant charges have also no relationship with the prevailing interest for the same class of creditworthiness and are in the nature of consideration for the services rendered for using the convenience of using the services by way of a credit card and hence taxable.
Though it is very difficult to understand the meaning of the above clarification, leave alone the point of law, on repeated reading of the above, it can be inferred:
++ Interest on credit card outstanding balance / EMI is includable in the value for computing Service Tax.
++ The credit facility extended by the card issuing banks cannot be equated with "loans and advances" to exclude interest component from Service value.
But, it still remains a puzzle as to why the outstanding amount in credit card account cannot be treated as "loan/advance". What happens if a card holder obtains a personal loan from the same bank and repays the entire credit card balance? In such a case, the interest charged on personal loan is not taxable. But if you continue the same loan in the form of credit card outstanding amount, the interest becomes taxable. What an anomaly! And in some cases, part of the credit card overdues are paid with a loan from the bank and partly by an EMI allowed on the card. Then is service tax payable for the EMI interest and tax payable on the loan part?
When the whole nation is trying hard to go cashless, and even when the PoS machines are exempted, levy of Service Tax on interest charges collected by Credit card issuing banks is unreasonable, unfair and archaic. More so, when by notification 52/2016-ST dated 8 December 2016 exemption is granted to services provided by an acquiring bank, to any person in relation to settlement of an amount upto two thousand rupees in a single transaction transacted through credit card, debit card, charge card or other payment card service.
The Board should take this matter seriously and examine afresh instead of merely reproducing the contents of the Education Guide. And even if they think it is taxable, the Finance Minister should exempt it.