Brief History of Applicability of Service Tax on Banks :
(A) Position under Positive List of Taxation
Some of the banking services have been brought under the Service Tax net. Banks need to ensure that all unpaid service tax liability is adequately provided. It is worth highlighting here that Service Tax was introduced in India on 01.07.1994. However, Banking and Other Financial Services had been brought within the ambit of Service Tax w.e.f. 16.07.2001. Services mentioned in clause (a) of section 65 (12) of the Finance Act, 1994 is taxable if provided by:
(a) Banking company and financial institution including NBFCs from 16th July, 2001; or
(b) Any other body corporate from 16th August, 2002; or
(c) Any other commercial concern from September 10, 2004.
Services mentioned in clause (b) of section 65 (12) of the Finance Act, 1994 is taxable if provided by:
(a) Banking companies, financial institutions including NBFCs and other body corporates from July 1, 2003; or
(b) Commercial Concerns from 10th September, 2004.
With effect from 16.5.2008, section 65(12) has been amended so as to levy service tax on foreign exchange broking and purchase or sale of foreign currency, including money changing, provided by a foreign exchange broker or an authorised dealer in foreign exchange or an authorised money changer also.
(B) Position under Negative List of Services which is applicable w.e.f. 01.07.2012 After the introduction of Negative List i.e. with effect from 01.07.2012 Service Tax is applicable on all services provided by banks except followings:
Services by the Reserve Bank of India;
services by way of—
(i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;
(ii) inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers.
In addition, Banks are also required to pay service tax under reverse charge mechanism in following cases:
a) Full Reverse Charge i.e. 100% amount of Service Tax
Services provided by recovery agent;
Arbitral Tribunal and Legal Services;
Services provided by Director;
Import of Services;
Services of Transport of Goods by a Goods Transport Agency;
Services by way of supply of manpower for any purpose;
Services by way of renting of a motor vehicle designed to carry passengers after availing prescribed abatement [which is presently 60% of the total amount charged]; and
Services by Government or a Local Authority excluding Renting of Immovable Property Services, Services by Department of Posts by way of speed post, express parcel post, life insurance and agency services, Services in relation to an aircraft or a vessel and Services of transport of goods or passengers
b) Partial Reverse Charge:
In respect of the following taxable services 50% amount of applicable Service Tax to be paid by Bank under Partial Reverse. The remaining 50% of the applicable Service Tax shall be charged by the Service Provider in his/its invoice.
Works Contract Services
Services by way of Renting of a motor vehicle designed to carry passengers without availing the prescribed abatement i.e. on gross amount charged.
Point of Taxation for Service Tax payable under reverse charge is at payment made to service provider. Where the payment is not made within a period of three months from the date of invoice, the point of taxation shall be the date immediately following the said period of three months.