Service Tax Notices Spook Banks

Mumbai, June 27 | Updated: Jun 28 2004, 05:54am hrs
The banking industry is perturbed over a series of notices served by Central Excise authorities for the payment of service tax on core activities such as collection of cheques, remittance of funds, acceptance of deposits, grant of loans and advances, investment of bank funds, issue of demand drafts and guarantees.

The Indian Banks Association (IBA) has taken up the matter with the Central Board of Excise and Customs (CBEC). It says that as per the provisions contained in section 65 (12) of the Finance Act 1994, which was amended in 2003, the question of such services being subject to service tax does not arise.

IBA has argued that the definition of banking and financial services as contained in clause (12) of section 65 does not include core banking activities and the above given services which are part of day-to-day banking activities. Since such services are not covered by the aforesaid provision contained in section 65 (12), the question of such services being subject to service tax does not arise, IBA said.

Taxing Times

Central Excise has served notices for levy of service tax on core banking areas
IBA has taken up the matter with the Central Board of Excise and Customs
IBA says that such activities are part of the day-to-day banking activities and wont be subject to service tax
Excise notices have been served for recovery of service tax on the commission paid to the banks for sale of government bonds

IBA sources told FE that the Central Excise authorities across the country have sent out notices to some of the branches of member banks inviting information on banking and financial services and business auxiliary services. On perusal of the notices, we find that there are some misunderstandings with regard to banking and financial services that are liable to service tax, sources said.

IBA said billing, collection or recovery of cheques referred to in sub-clause (iv) has to be read with the other part of clause (19) which defines business auxiliary services. In other words, if there is any business activity engaged in promotion or marketing of goods or services and incidental to such service, the business also takes the responsibility of collecting cheques for such services rendered, such activity of collection of cheques would be subject to service tax.

It is inappropriate for Central Excise authorities to call for information from the branches of the banks in relation to activities of collection of cheques on the basis that such service is taxable under the entry of business auxiliary service as defined in clause (19) of section 65. However, clause (19) is not applicable to the banks and financial institutions, IBA pleaded.

IBA pointed out that the commission or other charges recovered by the branches of banks from their customers for collection of cheques, remittance of funds, issues of demand drafts and similar other activities are very insignificant and small amounts transaction-wise and each customer-wise. It is, therefore, not at all practicable to add the element of service tax in such commission or charges and recover it from the customers of the banks and in turn pay the same to the government. It is for this reason that the core banking services are not included as taxable service under the provisions of Finance Act, 1994, IBA noted.

IBA has expressed surprise over notices served by the Cental Excise authorities for recovery of service tax on the commission paid to the banks for sale of government bonds and other securities. Sale of RBI relief bonds or other securities of the government to the members of public is done by the banks are required by the government as a public service.

IBA was also disappointed as one of its member banks had received notice inviting information on loan to the customers for the purchase of motor/scooter vehicles, household goods, home loans and education loans.