Shishir Sinha

The New Delhi Bench of CESTAT (Customs, Excise & Service Tax Appellate Tribunal) has ruled that banks are not liable to pay service tax on providing support to exporters and importers in international trade.

This, along with a ruling of the Madras High Court last year, is expected to clear all doubts on taxability of similar transactions under the Goods and Services Tax (GST).

Taking note of an order by the Central Excise & Service Tax Department in 2013 on a reply submitted to a show-cause notice, the Tribunal cited two reasons for dropping the demand made in the show-cause notice. The first is that a foreign bank does not transact business of banking in India and, therefore, will not fall within the definition of a banking company, which is a pre-requisite for a service to be covered under ‘banking & other financial services.’

The second is that an Indian bank does not pay any amount to the foreign bank and, in fact, the Indian bank only plays a role of a mediator between the Indian exporter and the foreign banker representing the foreign importer. This is a general practice that the exporters are required to follow by routing the export documents through a banking channel. Thus, the Indian bank does not receive any service from the foreign bank.

“The inevitable conclusion that follows from the above discussion is that the Indian bank is not the recipient of any service rendered by the foreign bank and, therefore, there is no liability to pay service tax on a reverse charge mechanism,” CESTAT said while setting aside an order dated March 30, 2017 against the appellant State Bank of Bikaner & Jaipur (now merged with State Bank of India). The ruling was pronounced on August 5.

Reverse charge means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services in respect of notified categories of supply.

In international trade, a chain of different banks (including overseas) are involved in providing support to Indian exporters. The Tax Department, in cavalier manner, raised demands on the exporters and simultaneously on the Indian banks (who provided services in these transactions), and demanded, under the reverse charge mechanism, service tax on the services provided by the overseas banks, from both these parties.

In the matter of BGR Energy Systems Ltd vs Additional Commissioner of GST & Central Excise, Chennai, the Madras High Court held that the Indian exporter is the recipient of the overseas bank’s services, and thereby, relieved Indian banks from the responsibility of paying tax. Now, in the present matter, the decision clarifies and ratifies that the bank cannot be liable for service tax. This can be a potentially significant move under the reverse charge mechanism.

comment COMMENT NOW