Applicability

Service tax would be applicable on the activity of 'agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act;', mentioned in clause 'e' of section 66E to the Finance Act 1994, which provides the activities to be considered as "Declared Services".

Based on this, there is a view that if a consideration is received for the said service, in the nature of penal charges or late payment charges etc., then the same shall attract the levy of Service Tax.

However, as per rule 6 of the Service Tax (Determination of Value) Rules, 2006, interest on delayed payment of any consideration for provision of services shall not be included in the value of any taxable service. This leads to the interpretation that the late payment interest charged is not taxable under Service Tax.