Tax on interest on loan from foreign financial institution

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visu iyer (Querist)

13 November 2013 Folks,

Please do let me know, whether interest on loan paid to foreign bank(not located in India) or the associate enterprises (whose place of business is not in India) is taxable in service tax under Rule 2(1)(d) under reverse charge mechanism as per Rule 3 of place of provision rules.

if so, please cite the relevant notification or circular for update

thanks and regards.

Nikhil Kaushik

Nikhil Kaushik (Expert)

13 November 2013 see if this helps:

https://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=16751

visu iyer

visu iyer (Querist)

14 November 2013
Thank u Nikhil ji..
but it was about bank charges..
My Query is about interest..!!

If Interest is also taxable; will the abatement @ 90% be allowed or not..!!

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

26 July 2025 Great question! Here’s the breakdown on **service tax applicability on interest paid to foreign financial institutions (FIs)** under the reverse charge mechanism (RCM):

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### 1. **Is interest on loan paid to foreign bank/FI taxable under Service Tax?**

* **Generally, interest on loans** is considered a **financial service**.
* Under the **Finance Act and Service Tax Rules**, financial services (including loan interest) are taxable services.
* However, the place of provision and applicability of RCM (reverse charge mechanism) depends on whether the service is considered as provided *in India*.

### 2. **Place of Provision Rules - Rule 3**

* Rule 3 defines place of provision of "imported services."
* If you are receiving services (like interest on loans from foreign FI) from outside India and using them in India, the place of provision is India.
* So, **interest paid to foreign FI is covered under reverse charge**, meaning the Indian recipient (you or your company) has to pay service tax on that interest.

### 3. **Is abatement applicable?**

* For financial services, **abatement of 90% is generally allowed**.
* This means only 10% of the gross amount (interest in this case) is taxable.

### 4. **Notifications/Circulars**

* **Notification No. 30/2012-ST dated 20.06.2012** covers abatement for banking and other financial services.
* The **Central Excise (Service Tax) Rules, 1994** (as amended) cover RCM under Rule 7(3) and place of provision under Rule 3.

### 5. **Summary:**

| Aspect | Status |
| ------------------------------ | ------------------------------------------------ |
| Interest to foreign FI | Taxable service under Service Tax |
| Place of provision | India (if used here) |
| Reverse Charge Mechanism (RCM) | Yes, recipient liable to pay |
| Abatement allowed | 90% abatement applicable, tax on 10% of interest |
| Applicable rate | 15% (Standard Service Tax rate before GST) |

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### Practical steps:

* You (recipient) should pay service tax on 10% of the interest amount under reverse charge.
* Report and pay this tax in your Service Tax returns.
* Keep documentary evidence of interest paid to foreign FI.

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If you want, I can help draft a summary note with relevant circulars and notifications for your reference or compliance team. Would that help?

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