TAXATION LAW-II

IV YEAR
XI TRIMESTER

COPORATE SOCIAL RESPONSIBILITY AND

FIGHTING POVERTY

Submitted by:
Varun Yadav
I.D. No 2107
B.A., L.L.B (Hons.)
Date of Submission : January 13, 2017

INTRODUCTION
Service Tax refers to the tax levied on provision of services. The levy of service tax in
India continues to be governed by the provisions of the Finance Act, 1994 and the various rules
regulations and notifications/circulars made in consequence thereof. Prior to 2012, the levy of
service tax was done in quite a different manner. A positive list under s. 65 specified the various
categories of services that were considered taxable. Apart from these services, all other services
not mentioned in the section were considered non-taxable as regards service tax. Subsequently
however, the law was amended to include a negative list of services under S. 66D. S. 66D
contains a list of number of services which are excluded from the ambit of service tax, i.e., they
are non-taxable services. All other services, not mentioned in the section, shall be considered
taxable unless specifically exempted through notifications issued by the Government.
This project seeks to undertake a detailed analysis of the imposition and impact of levy of
service tax on three industries the education industry, the banking and financial industry, and
the entertainment industry. These industries are vast industries and cannot be categorized by
merely a single service. They encompass a wide range of transactions and services, each of
which is dealt in a different manner. The project seeks to establish whether such services are
taxable services or not in the first place and subsequently delve into a deeper understanding by
determining what the point of taxation for such services is, what the place of provision of service
is and whether CENVAT credit can be claimed for inputs, capital goods and input service for
these services.

RESEARCH METHODOLOGY

BANKING AND FINANCIAL SERVICES: PRIOR TO GST

REGIME
Banking services are covered under the definition of service under S. 65B(44) as it is
provided for consideration.1 The banking and financial industry also includes within its ambit
financial leasing and hire purchasing. The imposition of service tax on financial leasing and hire
purchase was challenged before the Supreme Court in the case of Association of Leasing and
Financial Service Companies v. Union of India.2 It was contended that levy of service tax was
beyond the legislative competence of the Parliament and the power to tax hire purchase and
leasing was within the purview of States under Entry 54 of List II. The Supreme Court rejected
this contention and held that Parliament derived its powers from Entry 97, List I and that the levy
of service tax was not ultra vires.
Certain categories of banking services are considered as non-taxable services as these are
mentioned in the negative list. For example, sub-section (b) of S. 66D specifies that services
provided by the Reserve Bank of India shall not be taxable. 3 This section however does not
encompass the services provided by the subsidiaries of the Reserve Bank of India. If any service
is provided by the subsidiaries of the Reserve Bank, such as the Deposit Insurance and Credit
Guarantee Corporation, they shall be liable to service tax unless otherwise exempted. 4
Additionally, S. 66D(n) states that services by way of extending deposits, loans or advances in so
far as the consideration is represented by way of interest or discount; and inter se sale or
purchase of foreign currency amongst banks or authorized dealers of foreign exchange or
1 S. 65B(44), Finance Act, 1994.
2 Association of Leasing and Financial Service Companies v. Union of India, [2010] 29 STT
316.
3 S. 66D(b), Finance Act, 1994.
4 Gupta, supra note 2, at 629.

amongst banks and such dealers are non-taxable.5 Interest refers only to those monies, which are
recovered on account of a debt incurred or sum borrowed. 6 Interest on credit card dues would
also be considered to be covered within this category as it can be categorized as an interest on
loan. This is because the credit card holder buys products from a vendor and the bank pays the
latter on behalf of the card holder. Till the card holder pays the bank, he is to be considered a
debtor of the bank.7 As to interest in the form of a penalty, the value of taxable service shall be
determined after disregarding any interest on delayed payment of instalments etc. This is
reflected in Rule 6 of the Service Tax (Determination of Value) Rules, 2006. 8 Rule 2B of the
Valuation Rules further provides the method for calculation of value of taxable service as regards
the sale and purchase of foreign currency.
Banking and financial services are not mentioned in the list of declared services.
However, financial leasing and hire purchase is covered by fact of clause (g) of S. 66E, which in
its list of declared services mentions activities in relation to delivery of goods on hire purchase or
any system of payment by instalments. The service tax is levied on activities in relation to hire
purchase and not the hire purchase itself.9 These activities are processing fees, management fees,
documentation charges etc.10 Due to Article 366(29A) of the Constitution of India, service tax on
delivery of goods on hire purchase is not sustainable as it is considered a deemed sale of goods. 11
Additionally, a hire purchase agreement has to be distinguished from a hire purchase finance
5 S. 66D(n), Finance Act, 1994.
6 Cauvery Spinning and Weaving Mills Ltd. v. DCIT, 2012 (340) ITR 0550; CIT v. H.P. Housing
Board, 2012 (340) ITR 0388.
7 Canara Bank v. CC&CE, [2013] 29 taxamnn.com 157.
8 Rule 6(2)(iv), Service Tax (Determination of Value) Rules, 2006
9 Gupta, supra note 2, at 652.
10 Gupta, supra note 2, at 656.
11 Article 366(29A), THE CONSTITUTION OF INDIA, 1950.

agreement. In the former, the title of the goods remains with the hire purchase company and the
company merely hires out the goods to the hire purchaser with the option to purchase. The title is
transferred only when the hire purchaser seeks to exercise the option and pay the full amount. On
the other hand, in a hire purchase finance agreement, the title to the goods passes to the hire
purchaser from the beginning itself.12
A financial lease must possess certain essential characters. If the lease does not provide
for the transfer of ownership of the equipment at the end of the lease period, the lessee does not
assume the risks and rewards associated with ownership, the effective control remains with the
lessor and the time period of the lease bears no relation to the economic life of the asset, then it
cannot be said to be a financial lease.13
As per Item 29 in exemption notification 25/12, the services provided by a sub-broker or
an authorized person to a stock broker; Mutual Fund agent to a mutual fund or asset management
company; and business facilitator or business correspondent to banks in a rural area, are all
exempt from taxation.14
Financial leasing and hire-purchasing has been provided under Notification No. 26/12,
Item No. 1. As per the notification, a ten percent abatement has been provided for this purpose on
the gross amount charged. Services in relation to chit are provided a 70% abatement if CENVAT
credit is not availed of.15
The service provider, that is the banking company, shall be responsible for payment of
service tax as there is no mention of reverse charge for banking services in Notification 30/12.

12 Bajaj Auto Finance v. CCE, [2007] 9 STT 569; Sundaram Finance Ltd. v. State of Kerala,
[1996] 17 STC 489.
13 CCE&C v. G.E. India Industries (P) Ltd., [2008] 16 STT 431.
14 Circular No. 25/2012 dated June 20th 2012.
15 Circular No. 26/2012 dated June 20th 2012.

Similar to educational services, the point of taxation for banking and financial industry is
governed by Rule 3 of Point of Taxation Rules.16 For banking companies, even challans, bills etc.
which do not contain the addresses of service recipients and are not serially numbered shall
suffice for purposes of service tax as long as it contains other information ordinarily present in
such documents.17 In case of financial leasing and hiring, it may be considered a continuous
supply of service as it survives beyond three months and in this case the point of taxation would
the date of completion of provision of service as determinable by the contract.18
As per Rule 9(a) of the Place of Provision of Service Rules, the place of provision of
service provided by banking companies, financial institutions and non-banking companies to
account holders shall be the location of the service provider.19 In case these entities provide
service to persons other than account holders, the place of provision of service shall be the
location of the recipient of service as per Rule 3 of the concerned rules.20
According to Rule 6(3B) of CENVAT Credit Rules, banking companies, financial
institutions and non-banking financial companies engaged in extending loans, advances etc. are
required to pay an amount equal to fifty percent of the credit availed on inputs and input services
in a particular month.21

16 Rule 3, Point of Taxation Rules, 2011.

17 Proviso to Rule 4A, Service Tax Rules, 1994.
18 Second Proviso to Rule 3, Point of Taxation Rules, 2011.
19 Rule 9(a), Place of Provision of Service Rules, 2012.
20 Rule 3, Place of Provision of Service Rules, 2012.
21 Rule 6(3B), CENVAT Credit Rules, 2004.