Interest: A Comparative Analysis

Law under Service Tax:

Services are being taxed under the Negative List approach w.e.f. 01.07.2012. The Negative List, incorporated under Sec-66D of the Finance Act, contains a list of services which are not liable for service tax.  Services by way of “extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount” are contained in the Clause-(i) of sub-section-(n) to the said section & there by making it not taxable.

As per Sec-65B(30), “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.

Law under Income Tax:

The term interest has been defined u/s-2(28A) of the Income Tax Act, 1961 as “interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”.

Income from various sources by way of “interest” are generally taxable under the head “Income from Other Sources” (barring a few cases) & interest expended is allowable as deduction under various sections of the Income Tax Act, 1961. But let us focus on Sec-194A which deals with deduction of tax at source from “Interest other than interest on Securities”.

On a simple interpretation of  Sec-194A we find that a person shall deduct tax at source at the time of payment or credit, whichever is earlier, of interest if the amount or aggregate amount of interest exceeds  `.10,000/- in case of Banks etc & `.5,000/- in case of others.

Comparative Analysis:

On analysis of the scope of interest under both the tax laws it can be observed that under us-194A, TDS is required to be deducted on all amounts pertaining to interest, including processing fees but if we observe the definition of interest under Service tax laws we find that “interest” is covered under the Negative List & there by not liable for service tax but since the term “interest” does not include “processing fees” , therefore service tax shall be chargeable on  “processing fees”. Further under the service tax law the only instance where service tax is charged on interest is “interest on credit card”.

Illustration:

X Ltd has is liable to pay interest on loan to SBI amounting to `.15,000/-. For loan renewal purposes the bank has charged `.7,000/- as processing fees.

In this case the calculation of TDS us-194A for X Ltd shall be as under:     

This is generally the procedure for calculating TDS i.e. TDS is generally considered on gross amount, including service tax. The only exception is TDS us-194I, where tax is deducted before including service tax.