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Foreign banks under scanner of service tax authorities
April, 08th 2015

A day after Finance Minister Arun Jaitley sent a stern message to corporates and foreign investors saying levy of legitimate taxes is not terrorism, ET NOW learns that several leading foreign banks have come under the scanner of service tax authorities.

"The service tax department has kick-started an extensive probe against several leading foreign banks claiming service tax payments on the expenditure incurred by the head offices of these foreign banks which is attributable to domestic branches," two individuals familiar with the development told ET NOW. ET NOW was the first to report the development.

Documents relating to head office expenditure, tax returns of the foreign banks have been sought as part of the ongoing investigation and statements of bank officials are likely to be recorded, sources added. Some of the foreign banks have opposed the levy saying no entries have been made in their books of accounts relating to head office expenditure, and therefore service tax liability does not arise.

"The service tax authorities believe tax liability cannot be determined based on whether entries are made or not made in books of accounts. They have sought taxes based on the reverse charge mechanism under which entities in India are liable to pay service tax on services procured from entities based out of India," one of the two individuals cited above added.

If the standoff continues, the service tax authorities are likely to issue notices against 10-15 foreign banks in the coming weeks, sources added.

"The revenue's argument is as follows - If you are claiming an income tax exemption on the expenditure incurred by head offices, then foreign banks should also be paying service tax under the reverse charge mechanism. However, since for several decades, foreign banks have traditionally never accounted for the head office expenditure in their India books, this view of the department would be difficult to establish by reading the plain provisions of the service tax law. Given the difference of opinion, this matter is likely to be litigated extensively, if the revenue continues to hold the same position ," said Amit Kumar Sarkar, Partner, Grant Thornton India LLP.

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