The Economic Times daily newspaper is available online now.

    Top banks under taxman’s lens over service tax issue

    Synopsis

    At the heart of the matter is the lack of clarity on the tax liability on the annual fees that banks pay multinationals.

    Taxes gettyGetty Images
    Permanent establishment is a concept that determines the jurisdiction for companies to pay tax.
    NEW DELHI: The intelligence arm of the indirect tax department has asked three top banks to pay full tax due on fees paid to card and payment companies based outside India from as far back as six years ago.

    The Director General of GST Intelligence (DGGI) has issued notices to State Bank of India, ICICI Bank and HDFC Bank for “short payment of service tax” on the money they paid to multinationals such as MasterCard, Visa and American Express.

    At the heart of the matter is the lack of clarity on the tax liability on the annual fees that banks pay multinationals. Banks typically deduct tax at source on such payments — an amount that’s reimbursed to them — and also pay service tax.

    The intelligence arm’s investigations show that banks deduct about 10% at source on such payments to multinationals. However, the authorities said the banks are liable to pay tax on the gross figure — the fees and the amount deducted at source.

    “…(it’s learnt that) your bank had short paid service tax on account of non-grossing up of TDS (tax deducted at source) in association/settlement charges made by them to their overseas service providers in respect of credit card, debit card, charge card or other payment card-related services received by them in India,” reads the notice issued to a bank. ET has reviewed the notice, which demands tax since 2012-13 from the bank.

    The three banks did not respond to ET’s queries seeking comment on the notices. More banks could be issued notices soon, said people aware of the matter.

    “While notices have been issued to three banks now, more notices will be issued in the coming weeks,” a banking official told ET. Tax experts pointed out that in many situations, the tax deducted at source is reimbursed to the banks, which they claim is not income.

    “Whenever Indian companies are required to deduct TDS under income tax, service tax liability is required to be paid on the grossed up amount. However, many companies have independent commercial arrangements where such TDS is reimbursed to Indian companies by the foreign service-providers. In such cases, Indian companies are reluctant to pay service tax under reverse charge as they don’t consider this as part of their expense,” said Sumit Lunker, a partner at PwC India. Some experts questioned the relevance of raising this demand under the goods and service tax regime, which was introduced in July 2017 and subsumed levies such as service tax.

    “The approach of the service tax authorities in raking up past service tax issues, leading to service tax demands in the GST era, is posing significant challenges for all businesses. There should be a sunset clause mandating a time limit to investigate and issue notices in respect of service tax matters as the focus of business has now moved to GST,” said MS Mani, a partner at Deloitte India.

    Tax experts also said that in most cases, the multinationals claim they do not have a permanent establishment in India and are hence not taxable.

    Permanent establishment is a concept that determines the jurisdiction for companies to pay tax.

    This is the second major investigation by the DGGI. ET reported in March last year that DGGI was examining whether contracts between banks and their service providers were disguised or fraudulent.

    The indirect tax department has also issued notices to banks seeking to levy GST on services such as issuing cheque books and additional credit cards, ATM use and refunds of fuel surcharge.


    (You can now subscribe to our Economic Times WhatsApp channel)
    (Catch all the Business News, Breaking News Budget 2024 News, Budget 2024 Live Coverage, Events and Latest News Updates on The Economic Times.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    ...more
    The Economic Times

    Stories you might be interested in