The Hindu Business Line : Service tax on bank loan

I have taken a loan of Rs 30,000 from SBI Card. At the time of giving consent, SBI assured me that only monthly EMI (equated monthly instalment) will be levied. In the monthly statement though, SBI levied service tax at Rs 44.84 on the loan amount. I thought the service tax would be levied only once, that is, at the time of the first EMI. But the bank has been charging service tax every month along with EMI. When I contacted the bank for clarification I was told that I have to pay service tax every month. But on making enquiries I found that other banks and financial institutes such as LIC Housing Finance Ltd do not charge service tax on the loan they sanction or at the time of first EMI. Kindly clarify whether SBI Card is right in charging service tax every month for a loan sanctioned once.

S. Haja Najeemudeen

As per the details furnished by you, State Bank of India has given you a loan on the basis of your SBI Card. You have not stated what type of card it is. Nevertheless, 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.

There is also the "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.

In your case, since a loan has been given by the bank, though on the basis of a card, this service will be more appropriately covered by the "banking and other financial services". However, for calculating the taxable value of the services, as per 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. The bank can only charge service tax on the amount it collects from you for providing this loan service to you, under heads such as `administrative expenses', `commissions', `service charges', etc.

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http://MentorQA.blogspot.com

S. Murugappan

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