Annexure VII

Banking and other financial services;

1. As per section 65(10) of the Finance Act, 1994, "banking and financial services" means the following services provided by a banking company or a financial institution including a non banking financial company, namely:-

(i) financial leasing services including equipment leasing and hire-purchase by a body corporate;

(ii) credit card services;

(iii) merchant banking services;

(iv) securities and foreign exchange (forex) broking;

(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial depository and trust services, but does not include cash management;

(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisition and advice on corporate restructuring and strategy; and

(vii) provision and transfer of information and data processing.

1.1 The taxable service, as per section 65(72)(zm) means any service provided, to a customer, by a banking company or a financial institution including a non banking financial company, in relation to banking and other financial services.

1.2 The definitions of ‘banking’, ‘banking company’, ‘financial institution’ and ‘nob-banking financial company’ as per the Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934 are given below:-

" banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

"banking company" means any company which transacts the business of banking in India.

"financial institution" means any non-banking institution which carries on as its business or part of its business any of the following activities, namely-

(i) the financing, whether by way of making loans or advances or otherwise, of any activity other than its own:

(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a government or local authority or other marketable securities of like nature:

(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause (c) of section 2 of the Hire Purchase Act. 1972 (26 of 1972):

(iv) the carrying of any class of insurance business:

(v) managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto;

(vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lumpsump or otherwise, by way of subscription or by sale of units, or other instruments or in any other manner and awarding prizes or gifts whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person,

but does not include any institution, which carries on as its principal business-

a. agricultural operations; or
(aa) industrial activity; or

b. purchase or sale of any goods (other than securities) or providing of any service, or

c. the purchase, construction or sale of immovable property, so, however, that no portion of the income of the institution is derived from the financing of purchases, construction or sales of immovable property by other persons.

"non-banking financial company " means-

i. a financial institution which is a company;

ii. a non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;

iii. such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.

2. Financial services covered under the tax net are specifically mentioned in the definition itself.

2.1 Financial leasing including equipment leasing and hire purchase:

2.1.1 In case of financial leasing including equipment leasing and hire-purchase, the service is taxable only if it is rendered by a body corporate. The term ‘body corporate’ has the meaning assigned to it in clause (7) of section 2 of the Companies Act, 1956. Briefly, body corporate means a private limited, public limited company or a Government company. Such companies should be either a banking company or a financial institution or non-banking financial company to come under the tax net. In other words individuals, proprietorship or partnership firms will not come under the tax net. The leasing or hire-purchase may be of motor vehicles, machinery and equipment or other goods.

2.1.2 In the case of leasing or hire purchase, it is understood that the general business practice is as follows: The service provider enters into a leasing or hire-purchase agreement with the lessee or hire-purchaser. At the time of entering into the agreement, they collect a charge called lease management fee or processing fee or documentation charges or by any other name, which is usually a percentage of the transaction value. The lease rental or hire purchase amount is recovered in equated monthly instalments (EMI) over the period of lease or hire-purchase as indicated in the agreement through post dated cheques and no separate bills are raised for the monthly recovery. Every agreement bears a unique number.

2.1.3 The EMIs consist of recovery of principal amount (towards the original cost of the equipment) and finance /interest charges. The allocation between the principal and the finance/interest charges are known to and agreed upon by both the parties. The customer repayment schedule contains the details of the EMIs with the break up for the principal and the interest. In respect of leasing and hire-purchase, the amount recovered as principal is not the consideration for services rendered but is credited to the capital account of the lessor/hire purchase service provider. The interest/finance charges is the revenue or income and is credited to the revenue account. Such interest or finance charges together with the lease management fee/ processing fee/documentation charges is the consideration for the services rendered and, therefore, they constitute the value of taxable service and service tax is payable on this value. Accordingly it is clarified that service tax in the case of financial leasing including equipment leasing and hire purchase will be leviable only on the lease management fee/processing fee/documentation charges (recovered at the time of entering into the agreement) and on the finance/interest charges (recovered in equated monthly installments) and not on the principal amount.

2.1.4 A question has been raised whether lease or hire-purchase agreements entered into prior to the imposition of levy (prior to 16-7-2001) would be leviable to service tax. In this regard, it is clarified that such agreements entered into prior to 16-7-2001 will not be liable to service tax, provided the property/goods has also been received by the lessee prior to 16.7.2001.
2.2 Credit card services

2.2.1 This is a service where the customer is provided with credit facility for purchase of goods and services in shops, restaurants, hotels, railway bookings, petrol pumps, utility bill payments, etc. Cash advances are also permitted upto specified limits in most of the cases. This service is provided by nationalised banks, multi-national banks and private banks.

2.2.2 For rendering the service, the service provider collects joining fee, additional card fee, annual fee, replacement card fee, cash advance fee, charge slip/statement retrieval fee, surcharge/service charges on railway fare, fuel charges, and utility bill payments, charges on over limit accounts and late payment fee, interest on delayed payment, interest on revolving credit, etc. The fees may vary based on the type of card and from bank to bank. All these charges, including interest charges are made for the services rendered. Hence they all form part of the value of the taxable service in this case.

2.2.3 The service tax is leviable only in respect of transactions which are done using a credit card on or after 16th of July 2001. Any amount paid by a customer to credit card service provider in respect of transaction done prior to 16th July, 2001 is not liable to service tax even though such amount is paid on or after the 16th July, 2001.
2.3 Merchant banking services
Banks and Financial institutions including NBFCs providing merchant banking services are governed by the SEBI (Merchant Bankers) Rules, 1992 and SEBI (Merchant Bankers) Regulations, 1992. As per these rules and regulations, merchant banking service is any service provided in relation to issue management either by making arrangements regarding selling, buying or subscribing securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. This, inter-alia, consists of preparation of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscription for debt/ equity issue management and acting as advisor, consultant, co-manager, underwriter and portfolio manager. In addition, merchant banking services also include advisory services on corporate restructuring, debt or equity restructuring, loan restructuring, etc. The fee charged by the merchant banker for rendering these services will be the taxable value in respect of this service.
2.4 Asset management including portfolio management and all forms of fund management, pension fund mangement, custodial depository and trust services.

2.4.1 Asset management and portfolio managers are also governed by the SEBI (Portfolio Managers) Rules, 1993 and SEBI (Portfolio Managers) Regulations, 1993. As per these rules and regulations, the "portfolio manager" means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as discretionary manager or otherwise) the management or the administration of portfolio of securities or the funds of the client, as the case may be. They enter in agreement with the client and charge an agreed fee for providing the service. The tax will be leviable on the fee charged for providing these services. Similiarly in the case of other types of fund management such as pension fund management, service tax will be leviable on the fee charged for providing the service.

2.4.2 With respect to mutual funds, a question has been raised whether the asset management company is liable to pay service tax as it may not fall in the category of NBFC. It is clarified that such asset management companies are not NBFC. Hence they will not come under the purview of service tax.

2.4.3 Custodial depository services means safe keeping of securities of a client and providing services incidental thereto, and includes-


a. maintaining accounts of securities of a client;

b. collecting the benefit of rights accruing to the client in respect of the securities;

c. keeping the client informed of the action taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client; and

d. maintaining & reconciling records of the services referred to in sub-clause (a) to (c).

Taxable value is the fee charged for providing custodial services. However, service tax will not be leviable on NSDL or CSDL fees paid to the depositories and recovered from the customers on actuals basis.
2.5 Other auxiliary financial services


2.5.1 Some examples of other auxiliary financial services are investment and portfolio research and advice, advice given on mergers and acquisition, advice on corporate restructuring and strategy, market analysis and intelligence.

2.6 In the case of banks and financial institutions including NBFCs, while some services may be done in a centralised way (that is centralised billing and accounting) either at the head office or regional office, in respect of other services such as financial leasing including equipment leasing, specified branches may be providing the service with separate billing and accounting. In respect of a taxable service, where the billing and accounting is centralised in an office of the bank, only such office needs to be registered and made liable to pay service tax in respect of such service. Where the billing and accounting is not centralised and is undertaken by different branches of a bank or a financial institution including NBFCs, each such branch office will have to be registered and made responsible for payment of service tax and compliance with other procedural formalities.