Service tax on credit card service

This query is : Resolved

Chinmay Kamat (Querist)
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06 August 2009 my client in retail has a swiping machine. whenever he makes a sale through the credit card, the bank charges him a 1.7% commission on the amount that is credited to his account. they also used to charge service tax on the commission amount.

however, now the bank has started charging commission on the total amount credited. since ST rate is 10.3%, this makes a total cost of selling 12%, which is eroding the margin...

my query is whether the value adopted by the bank is proper.

thanks

CA CS CIMA Prakash Somani

CA CS CIMA Prakash Somani (Expert)
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06 August 2009 This depends on the business practice so unable to say it is proper or not

Chinmay Kamat

Chinmay Kamat (Querist)
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06 August 2009 S.67(1)(i) says simply that:

Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall, in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him.

the gross amount charged is the commission, and not the amount credited to the account. the consultant for the bank has misinterpreted the word 'gross' and calculated 10.3% on the total credit amount.

how can one charge service tax on something which is credited to the account, it can be charged only on an amount that is debited.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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24 July 2025 Great question! Here’s a clear explanation of the service tax on credit card commission charges based on your scenario:

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### **Service Tax on Credit Card Commission Charges**

* **What the bank charges:**
The bank charges a **commission** (e.g., 1.7%) on the amount credited to the merchant's account for credit card sales.

* **Service Tax on Commission:**
As per **Section 67(1)(i) of the Service Tax Law**, service tax is charged on the **gross amount charged by the service provider** for the service rendered.
In this case, the **service provider is the bank**, and the **service provided is the credit card processing service**.

* **Important Point:**
The **service tax should be levied on the commission amount (the fee charged by the bank), not on the total sales amount credited to the merchant’s account.**

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### **What’s Wrong with the Bank’s Calculation?**

* If the bank calculates service tax on the **entire amount credited to the merchant**, that is incorrect.
* Service tax should be levied **only on the commission fee charged by the bank**, not on the total transaction amount.

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### **Summary:**

| Amount | Explanation |
| --------------------------- | ------------------------------------ |
| Total Sale Amount | Amount credited to merchant |
| Commission (e.g., 1.7%) | Bank's fee for processing service |
| Service Tax (on commission) | Applicable on commission amount only |

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### **Your margin is being eroded because the bank is charging service tax on the entire amount instead of just on the commission. This is not proper according to service tax rules.**

You can advise your client to raise this issue with the bank or seek clarification from the bank's service tax consultant.

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If you want, I can help you draft a formal query or letter to the bank regarding this issue. Would that help?

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