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Service tax finds several banking services taxable on scrunity
January, 18th 2014

The Department of Service tax has found several banking services taxable on scrutiny following the negative list of services.

According to officials close to the development, some of the contentious issues are availing tax credit for payment of premium for insuring deposits, services rendered on behalf of the Reserve Bank of India (RBI) and commission on foreign exchange business. At present the banks treat most of these services exempt but they are not as per the department, sources said

The Department of Service Tax has also issued show cause notices to several banks in raising demand.

Explaining this, an official source said the banks pay premium to Deposit Insurance and Credit Guarantee Corporation (DICGC) for insuring their deposit (fixed deposits, saving banks deposits and current account) and pay 12% of the total amount paid premium as service tax.

Then these banks take credit for the service tax paid on these items for payment of taxes on other taxable services. The credit is availed by the banks for paying the service tax on insuring these items (various deposits) as according to banks these deposits are output services as per service tax rules.

However the Department is of the view that as per the rule 6 of the Cenvat Credit rules 2004, these deposits form part of negative services and not output services. Cenvat rules make it obligatory to get credit for payment of taxes on output services and not negative services as per the negative list. An output service is defined as any taxable service within taxable territory of India but does not include negative services as per cenvat credit rules and reverse charge payments.

While the department has found several omissions by the banks on this account in its scrutiny amounting to a lapse of around Rs 2,000-2,500 crore across the banking sector, this issue is still is under deliberation, said sources

Similarly, the RBI pays commission to the banks for collecting government taxes – customs, service tax, income tax etc. These are services rendered by the banks on behalf of the RBI. While department contends that banks should pay service tax on the commission received, banks at present do no pay service taxes.

Kerala Bench of CESTAT (Customs, Excise and Service Tax Appellate Tribunal) held that banks will not pay services tax on commission received from RBI on these services.

The department is of the view that as per the negative list, services rendered by RBI are exempt from service but services to RBI and services undertaken on behalf of the RBI are taxable as these are rendered free. These banks receive commission for these services discharged on behalf of the RBI and hence should pay service tax.

To this effect, a total demand has been firmed up to the tune of Rs 80-100 crore and show cause notices have been issued to banks.

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