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Bankers acts as an agent by conducting checking of current accounts for customers, paying cheques drawn on customers of the bank, collecting cheques deposited to customer’s current accounts and accepting deposits and lending loans, enable customer payments via automated clearing house, telegraphic transfer, mail transfer, electronic transfer etc., By providing the above mentioned services, bankers earn income by way of interest or discount, rental charges, service charges, commission and operational charges The taxability under Finance At, 1994 of various such services provided by banking company discussed below.


The service provided by banking company will be covered under the definition of service under section 65B (44) of Finance Act, 1994.

Section 65B (44) of Finance Act, 1994 reads as below:

“Service means any activity carried out by a person for another for consideration, and includes declared services, but does not include (i)….. (ii) ….. (iii) a transaction  in money or actionable claim”.

And further clause (n) of section 66D “Negative List of Services” specifies certain services related to banking services as non taxable which reads as follows

“Services by way of:

1. Extending deposits, loans and advances in so far as the consideration is represented by way of interest and discounts.

2. Inter se sale or purchase of foreign currency amongst banks or authorized dealers of foreign exchange or amongst banks and such dealers”

By the virtue of above read sections all the income earned by bank will fall under service tax net except income in the nature of interest or discounts and sale and purchase of foreign currency amongst banks and financial institutions.


The meaning of deposits, loans or advances as explained in CBEC’s Education Guide are replicated below:

a. Fixed deposits or saving deposits or any other such deposits in a bank or a financial institution for which return is received by way of interest.

b. Providing a loan or overdraft facility or a credit limit facility in consideration for payment of interest or discount

c. Mortgages or loan with a collateral security to the extent that the consideration for advancing such loans or advances is represented by way of interest or discounts.

d. Corporate deposits to the extent that the consideration for advancing such loans or advances are represented by way of interest or discount.


The word ‘interest’ has been defined under section 65B (30) as:

”Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or similar rights or obligations) but does not include any service fee or other charges in respect of money’s borrowed or debt incurred or in respect of any credit facility which has not been utilized”

And further clause (iv) of rule 6 (2) [rule 6 of service tax (determination of values) Rules 2006] which specifies the inclusion and exclusion of value of taxable services specifically exclude ‘Interest on delayed payment’ from value of taxable services. The said rule reads as follows

“Interest on delayed payment of any consideration for the provision of service or sales of property, whether movable or immovable”

In the light of the above read provision and rules, it is clarified that interest payable on deposit, loans or advances and interest on delayed payment are fall outside the gambit of service tax and no tax is payable on such services. However service fee or any other charges in respect of money borrowed or debt incurred or any part of unutilized credit facility does not comes under the meaning of interest. Hence on such charges or fees service tax is payable.


Clause (n) (ii) of section 66D excludes sale or purchase of foreign currency from leviability of service tax, if such sale or purchase takes place:

a. Amongst banks

b. Amongst authorized dealers

c. Amongst banks and such dealers

Service tax is not leviable in sale or purchase of foreign currency only when such service takes place amongst the persons authorized to deal in foreign currency. The tax is payable when sales or purchases takes place to/from the final consumers of foreign currency.

As per rule 2B of service tax (determination of value) Rules, 2006 value of purchase and sales of foreign currency including money changing provided by banks shall be determined by the service provider as follows:





When Exchange rate is from/to Indian currency

(Selling rate minus Buying rate) multiplied by  RBI Reference rate for that period


When RBI reference rate for that currency is not available

1% of the gross amount of INR provided or received by the service receiver.


Neither of the currency is exchanged in Indian currency

1% of the two amounts of the currency exchanged by converting into INR at rate provided by RBI

Rule 6(B) of service tax rules provides an option to pay service tax for service provider of purchase and sale of foreign currency including money changing as below:

Limit  (gross amount of currency exchanged)

Rate of Tax (on gross amount of currency exchanged)

Upto Rs 1,00,00


Above Rs 1,00,000 upto Rs. 10,00,000

Rs.120 + (0.06% of amount exceeding Rs. 1,00,000)

Above Rs 10,00,000

Rs. 660+ (0.012% of amount exceeding Rs. 10,00,000) subject to maximum of Rs.6,000/-

If a service provider exercise the above option he need not compute service tax at the rate specified under section 66B (i.e., @12.36% on the value of service provided). Once the service provider opts to pay tax under this rule, he must follow the method of payment for the entire financial year and shall not be withdrawn during the remaining part of the financial year.


Services provided by the RBI are non taxable services as the same specified under ‘Negative List of Services’. Clause (b) of section 66D reads as follows:

“Services by the Reserve Bank of India”

Only the service provided by RBI is non-taxable service but not:

a. Any services provided to RBI

b. Services provided by any other subsidiary banks of the RBI.

c. When similar services provided by other banks authorized by the RBI

There are some services where the service recipient is liable to pay service tax. If any such services are received by the RBI, then it will be liable to pay service tax under reverse charges.


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(Assistant Manager - Finance)
Category Service Tax   Report

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