Service Tax: Neither foreign banks nor recipient of services paying tax on import of services!

Whereas exporter's bank in India has been found to be paying service tax in all the cases, it appears that 'Bank Charges' charged by foreign bank escapes service tax liabilities.

The service provided by 'Banking and other financial institutions' has been made taxable w.e.f. 16.7.2007, the scope of which has been amended subsequently. As per Section 65(105) (zm) of Finance Act, 1994; the said taxable service has been defined as –

"Taxable service is a service provided or to be provided to a customer, by a banking company or a financial institution including a non-banking financial company, or any other body corporate of [commercial concern], in relation to banking and other financial services."

The Finance act has included certain services as Banking and financial services, the relevant definition is reproduced below –

"Banking and other financial Services" – means – (a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or [commercial concern], namely –

(i)
(ii)
(iii)
(iv)
..
..

(ix) other financial services, namely, lending; issue of pay order, demand draft, cheque letter or credit and bill of exchange, transfer of money including telegraphic transfer, mail transfer and electronic transfer, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults, operation of bank accounts."

If a service has been provided by a Indian Bank to any person, then as per Section 68(1) of Finance Act, 1994, the bank will be liable for the payment of service ta. But in case, the service has been received from outside India as it has been delivered by a foreign Bank to an exporter, then the exporter being a recipient of service is liable to discharge the service tax liability as a 'deemed service provider' in terms of provisions contained in Section 66 A of Financial Act, 1994, which provided –

"Where any service specified in clause (105) of Section 65 is, -

(a) Provided or to be provided by a person who has established a business or has his permanent address or usual place of residence, in a country other than India, and

(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purpose of this section, be taxable service, and such taxable accordingly all the provisions of this Chapter shall apply."

When an exporter receives export proceeds, their Bank in India sends export documents to their counterpart – (Foreign Bank) for further necessary action. Such foreign banks then proceed further and realize export proceeds from buyers. They remit the export proceeds at prevalent foreign exchange rate after deducting their Service Charges to Exporter's Bank in India.

Exporter's Bank in India then credit Exporter's account with proceeds so received after deducting their service tax on service charges and other misc. charges viz postage etc. Exporter's Bank in India in almost all cases pays service tax on service charges so received by them.

Hence, the services provided by the foreign Bank to the exporter is nothing, but covered in 'import of service', which has been provided from outside of India and used in relation to business of commerce. Hence, as per Rule 3(iii) of the 'Taxation' of Services (provided from outside India and received in India) Rule, 2006 the exporter is liable to pay tax on it.

However, it is a fact that majority of exporters are not paying Service Tax on foreign Bank Charges. They are in act not showing these charges separately in financial records. It appears that exporters are merging these charges in amount short received due to foreign exchanges fluctuation treating it as amount short realized. In financial records most of the exporters show net proceeds as export realization, bank charges charged by Indian bank, take credit of service tax paid by their bank and difference between agreed value and actual realization is shown in books under the head 'Foreign Exchange fluctuation account'. Because of this practice amount charged by foreign bank for service rendered by them does not appear in exporter's financial records and escapes service tax liabilities.

Vide Notification No. 41/2007(ST) dated 06.10.2007, Government has given the facility of refund to the exporters in respect of certain notified input services, which has been used in relation to export. Initially a few services were included for the benefit, which has been extended upto 15 services as on date. The service provided in relation to collection of export bills has also been included in the above list by Notification No. 17/2008 (ST) dated 01.04.2008. Now, the exporter service can claim the rebate on the amount of tax paid to the foreign Bank on the collection of the export bills, but what about the service tax remained unpaid for the above said activity since long.