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 Notification No. 22/2023 CENTRAL BOARD OF DIRECT TAXES

At your service, but there's a price to pay
December, 18th 2006

Service tax is levied on the provision of certain specified services and is generally applicable on the service provider. Have you ever wondered why you, the consumer, are required to pay service tax on air tickets, club membership and certain credit card payments? Saloni Roy from Ernst & Young explains.

For a service to be chargeable to service tax, a consideration/fee should have been charged. Service tax is not leviable on services that are free of cost. However, service tax is applicable on services where consideration is wholly or partly in money.

Currently, service tax (including education cess) is charged at the rate of 12.24% of the value of the service. The service tax rate has steadily increased from 5% at the time of introduction in 1994 and is expected to rise further in the coming years.

Coming to the case of credit cards, service tax should not be charged against the issuance of free credit cards. However, if charges such as issuance fee, annual fee, late payment fee etc are levied, then tax would be charged on the same.

No service tax is payable on the transaction value of purchases made using either a debit or credit card. Both banking services and credit card services have been included in the service tax net. Though the loan amount and the interest charged on a loan do not attract any service tax, the ancillary charges collected for the provision of loan, such as loan processing fee, administration fee are liable to service tax. Unlike interest charged on a loan, interest charged on a delayed payment under a credit card attracts service tax.

Charges collected for providing account statements, financial advisory services etc. are also liable to service tax.
In case of club memberships, service tax is payable with respect to services and facilities provided to members. Therefore, service tax would be charged on subscription charges, membership fees, fee for organisation of functions and get-togethers but not on the sale of food or beverages by clubs.
 
Service tax should not be charged by such organisations whose membership is required for practising certain professions, such as ICAI, Bar Councils etc. Further, clubs or associations which have objectives in the nature of public service and are of a charitable or political nature, are not subject to service tax.

Premium international air travel has also become liable to service tax. These services have been brought into the service tax net by the Union Budget 2006. It is important to note that tax is not applicable on economy class travel where economy class is the class attracting the lowest fare or if the flight has only one class then that class. Being a new taxable category, the scope of the levy is still unclear; issues such as the amount on which tax is to be charged in case of connecting international flights still remain to be clarified. Based on a recent clarification, in case of a Delhi-London-Chicago journey, the entire ticket value would attract service tax even though there is a stop over in London.

Apart from the above services, a wide variety of other services such as air travel agent, architect, interior decorator, photography, beauty parlour services, fashion design services also attract service tax.

The service tax net has been continuously expanded from its inception and it is expected that more services will be added by the coming budget, apart from an increase in the service tax rate.

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