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Direct selling agents to pay service tax on gross value
November, 15th 2006

The tax department is leaving no stone unturned on the service tax front. The Directorate-General of Central Excise Intelligence (DGCEI) has slapped show-cause notices on direct selling agents (DSAs) for auto and home loans, saying they should pay service tax on the gross value of their commission.

DSAs, which source and process loan applications on behalf of banks, receive gross commission after various deductions such as subventions to the customer (borne by the DSAs), penalties and income tax deducted at source. Faced with fierce competition, DSAs often offer incentives (subventions) to lure customers. They, however, used to pay tax on the actual commission they receive the gross amount minus deductions such as the commission foregone according to official sources,

the DGCEI has emphasised in a clutch of notices issued recently to a cross-section of DSAs that the service they provide is taxable at gross value. Promotion and marketing of any good or service is taxable under the head of business auxiliary services.

Analysts said although the directorates action has hit many DSAs, the burden will gradually shift to the banks. The DSAs would practically be spared from an additional onus in future. The DGCEI move will have implications for banks accounting practices.

Banks with large exposure to home and auto loans businesses such as ICICI Bank and HDFC Bank used to reckon the commission foregone by the DSA as interest income from the customer and account for the same.

Following the DGCEI notice, these banks have now amended this practice and instead started adjusting the interest rates for a segment of existing customers.

That is, the commission foregone by agents will now benefit the customer in the form of an interest rate reduction, rather than as interest which they have not actually paid, but accounted for by the bank as received from them.

Currently, DSAs get around 5% of the loan amount as commission. This has driven a large number of educated youngsters to take up a career in the DSA space. In actual practice, competition has forced these agents to forego up to 60-70% of the commission.

Business auxiliary services was brought under service tax ambit with effect from July 1, 03. The DGCEI action is to recover the tax from DSAs with retrospective effect.
As for future cases, the onus will be on the banks.

 
 
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