TAG Tax

The issue of applicability of Service tax on foreclosure charges collected by banks and non - banking financial companies (‘NBFCs’) on premature termination of loans has been a matter of contention with divergent opinions amongst various division benches of Ahmedabad¹ and Kolkata².

Recently, the Larger Bench of Customs, Excise and Service Tax Appellate Tribunal (‘CESTAT’) Chennai³, upheld that foreclosure charges shall not be leviable to Service tax.

The principles of this judgement shall have a wide reaching implication on interpretation of service provision, i.e., agreeing to the obligation to tolerate an act introduced in the negative list and continuing in the Goods and Services Tax (GST) regime. It would also be a relevant guide to determine the nature of amount received as compensation for premature termination of services.

Background

• The assessee provides housing loan to customers and was registered for service tax under the category of ‘banking and other financial services’. The definition of ‘banking and other financial services’ was amended to include ‘lending’ with effect from 10 September 2004.
• For the period from October 2004 to June 2007, the foreclosure charges where shown as miscellaneous income in the books of accounts and no service tax was paid on such charges. Subsequently, Revenue issued a show cause notice demanding service tax alongwith interest and penalty for the period prior to the negative list under service tax regime.

Tribunal’s Ruling

• The Tribunal held that loan foreclosure charges collected by banks and NBFC shall not be subject to Service tax

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