Service tax can be levied on penalty collected from service provider
This query is : Resolved
CA CS ARUN SINGH
(Querist)
04 November 2015
A service receiver bank can collect service tax on penalty amount charged by it on default made by service provider company?
CA Harish Suwalka
(Expert)
05 November 2015
Please elaborate the query.. with an example
24 July 2025
Regarding service tax on **penalty collected by a bank from a service provider** for default:
* **Penalty or fines** imposed for breach of contract, delay, or default **are not considered a 'service'** under service tax law.
* Service tax is levied on **consideration for a taxable service** provided.
* A penalty or liquidated damages collected by the bank **do not represent consideration for a service** rendered by the bank.
* Therefore, **service tax is generally NOT applicable on penalty amounts collected** from a service provider by the bank.
---
### Summary:
* **No service tax on penalty/late fees/ liquidated damages charged as a penalty by service receiver.**
* Service tax applies only on the value of actual services provided, not on penalties for non-performance or defaults.
---
If you want, I can help draft a detailed note or reference any relevant notifications or case laws on this. Would you like that?
* **Penalty or fines** imposed for breach of contract, delay, or default **are not considered a 'service'** under service tax law.
* Service tax is levied on **consideration for a taxable service** provided.
* A penalty or liquidated damages collected by the bank **do not represent consideration for a service** rendered by the bank.
* Therefore, **service tax is generally NOT applicable on penalty amounts collected** from a service provider by the bank.
---
### Summary:
* **No service tax on penalty/late fees/ liquidated damages charged as a penalty by service receiver.**
* Service tax applies only on the value of actual services provided, not on penalties for non-performance or defaults.
---
If you want, I can help draft a detailed note or reference any relevant notifications or case laws on this. Would you like that?
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