Banks’ foreclosure charges liable for service tax’

Pre-closure or foreclosure charges collected by banks and other companies, as part of their lending and financial services activities, would attract service tax, the Finance Ministry has clarified. This would imply that customers paying foreclosure charges may have to foot the service tax bill, as banks are likely to pass on the service tax burden to them. Services of banking companies or financial institutions attract service tax under ‘banking and other financial services’, which includes lending. The Central Board of Excise and Customs (CBEC) has taken a stance that pre-closure/foreclosure charges are not in the nature of ‘interest’, sources said.It has also been made clear that foreclosure charges are also not charges collected for delayed payment. As foreclosure charges are not ‘interest’, they are being treated as consideration for service provided and hence liable to service tax, the board has clarified. The field formations in the revenue department have brought to the notice of the CBEC that divergent practices were being followed on levy of service tax on services provided by banks and other financial institutions on the amount collected as pre-closure/foreclosure charges in relation to lending. – www.thehindubusinessline.com