Rigid Procedural requirements of CBEC making digital transactions expensive - Watal Committee report
WHEN you swipe a credit card at a Merchant establishment, the acquiring bank (the Bank of the Merchant establishment) charges some amount (called MDR) and pays Service Tax on it. The acquiring bank pays the issuing bank (the Bank which issued the credit card) part of such amount as "interchange" on which the issuing bank pays Service Tax. However, the acquiring bank is not able to avail any input credit on the Service Tax paid by the issuing bank, resulting in double taxation. This has been explained by the Watal Committee on Digital Payments in its report as:
Currently service tax is paid on MDR by the acquiring bank while the issuing bank pays service tax on interchange which is a part of same transactions. Acquirer banks find it difficult in raising input credit for service tax because of rigid procedural requirements.
19. Double taxation on service tax
Currently service tax is paid on MDR by the acquiring bank while the issuing bank pays service tax on interchange fee which is a part of the same transactions. It has been placed before the Committee that double taxation of service tax on interchange fees charged by card issuing bank for card transactions done at a merchant outlet increases burden of interchange costs for the acquirer.
Table 6.11.: Illustration for service tax payable on the card transaction
Particulars | Amount |
|---|---|
Transaction Amount | 10,000 |
MDR charged to merchant @2% | 200 |
Service tax on MDR charged @15% | 30 |
Issuer interchange charged to acquirer @1.5% | 150 |
Service tax on Interchange @15% | 23 |
Total charge to the acquirer (Interchange fees + Service tax) | 173 |
In the above illustration, out of the total MDR income charged to the merchant of Rs. 200, service tax is paid to the Government twice on Rs. 150 - once by acquirer and the second time by card issuer. Hence, service tax of Rs. 23 is paid twice.
The Committee had a detailed discussion on the above mentioned issue. The Committee looked into proviso to Rule 4A of the Service Tax Rules, 1994.
The acquirer here is unable to take input credit for the service tax paid by the card issuer of Rs. 23 since it does not have a legible document with all details of service tax paid by issuer on the interchange fees. Rule 4A of the service tax rules provides that for taking input credit the acquirer should have the document as per below criteria
1. A document with name, address and registration number of card issuer
2. Description and value of taxable service provided and
3. the service tax paid/payable.
The only way that the double taxation can be avoided here is by enabling the acquirer to take input credit for the service tax paid by the issuer of Rs. 23 input credit for service tax on Interchange fees based on the statement received from card schemes i.e. VISA/Master/Rupay for the interchange fees charged by the respective issuers. Once the acquirer is able to take credit for the service tax paid by the issuer, the Interchange cost will reduce from Rs. 173 to Rs. 150.
The Rule as mentioned above for the requirement of the details in the document needs to be amended in lines with the proviso for rule 4 A for services provided by a banking and non banking financial institutions, which exempts certain requirements to be included in the document for availing the input credit of service tax.
In this backdrop, the Committee is of the view that in order to facilitate service tax input credit of digital transactions, Central Board of Excise and Customs (CBEC) to review the existing procedural framework and issue necessary instructions.