The trigger for this topic is a question that a reader asked:
“I would like to know whether service tax is applicable under Section 66A of the erstwhile Act on availing Buyer’s credit? It is not only the interest which is paid but a number of other fees like the management fees, arrangement fees, hedging cost etc which is paid to banks by the importer”
Buyer’s Credit is a loan in foreign currency extended by Indian Banks Overseas branches or Subsidiaries or Foreign Banks, where in consideration is paid by way of interest.
To answer the above question one needs the understanding of Service Tax Act applicability on various cost heads of buyers credit transaction and paid to whom.
- Interest (Paid to overseas bank / branches)
- Letter of Undertaking charges and Swift charges (Paid to Indian Bank)
- Forward Premium and Forward Contract charges (Paid to Indian Bank).
- Arrangement Fee (Paid to Buyers Credit Consultants, Broker or Indian Banks)
- Withholding Tax (WHT) (Paid to Income Tax Department)
- Others Charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges etc. (Paid to Banks and CA)
Applicable Regulations of Service Tax Act to be kept in mind for deciding taxability (with effect from 01 July 2012)
- Section 66B (Charging Section),
- Rule 2 (1) (d) of the Service Tax Rules, 1994 (For Reverse Charge mechanism),
- Rule 9 of Place of Provision of Services Rules, 2012,
- Negative list of services as per Section 66D as inserted by Finance Act, 2012. The negative list comprises of services where in Service Tax is not applicable, namely:-
(n) services by way of-
(i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;
Service tax is not applicable on the Overseas Bank Interest Cost and Withholding Tax / TDS as the same is mentioned in the Negative list of Services.
Rest all other services will be liable to Service Tax as not mentioned either in Negative List or Mega Exemption Notification (25 / 2012 – ST 20.06.2012) (as amended). Further, there is no specific exemption to the said services by issuance of any other notification.
All the other services / costs will be taxable under various heads of Services like “Banking & Financial Services“, “Management Consultant Services” or “Foreign Exchange Broker Service“, “Business Auxiliary Service” or “Business Support Service” depending upon the Nature of Service, Service Recipient and Service Provider.
Importers are advised to go through the above cited rules and sections for better clarity and refer to Service Tax Consultants as the taxability might vary on case to case basis.