Service tax on late payment charges of credit card

Dear Vinay,

There may be two interpretations for this act.

Firstly, the amount in this case can be taken as consideration received for foregoing the right to collect interest/sue the defaulter. If the defaulter does not pay the late payment charges, the credit card company can Collect Interest/Sue the card-holder for late payment. Hence the company is deemed to be providing a service of Act of forbearance - Act not to Collect interest/Sue the card-holder.

Hence, this service falls under "Declared Services" under Section 66E of the Finance Act as amended, consequent to Negative list based Service Tax.

Another interpretation is that since the Late payment charges are collected in relation to the provision of Credit Card services, the charges fall under the head Credit card services.

Thanks & Regards,

JSS

Dear Vinay,

There are 2 views availble for this issue. Hence it is a debatable issue at present.

View 1 : CBEC View :

This interest is on delay in making payment for services provided and hence these exorbitant charges has no relationship with the prevailing interest. Thus, these are in the nature of consideration for the services rendered for using the convenience of using the services by way of credit card and hence taxable.

View 2 : Judicial View :

Interest on delayed payment of credit provided by way of credit card is on delay in making payment for use of money. Prima-facie interest on credit card dues partakes the character of “interest on loan” and, therefore, it shall not form part of value of credit card related services. [CANARA BANK – 2013 – TRIBUNAL ]

My Opinion :

I am in favour of view 2. Prima-facie judicial view appears to be correct view, as “interest” will fall under section 66D(n), even if rate is exorbitant.

Section 66D(n) : “Extending deposits, loans or advances in so far as consideration is represented by way of interest or discount.”

Supporting Argument :

If a person fails to pay installment of loan timely, then bank charges penal interest of 1% over and above normal rate of interest. This interest is not covered by negative list and also contention is raised that it is covered under declared service u/s 66E(e) i.e Agreeing to tolerate an act. But Rule 6 of Service Tax Valuation Rules, 2006 specifically excludes such interest from inclusion in valuation of service and therefore, penal interest is not leviable to service tax.

This penal interest is also an interest charged for delay in making payment of money, hence can be excluded from value of service on the same grounds.

Judi