Service Tax cannot be levied on foreclosure charges for loans, Tribunal rules

The Bigger Bench of Customs Excise and Service Tax Appellate Tribunal mentioned foreclosures fees can not fall inside the ambit of service below banking and different monetary providers

The Bigger Bench of Customs Excise and Service Tax Appellate Tribunal (CESTAT), Chennai has dominated that service tax can’t be levied on foreclosures fees collected from clients by banks and non-banking monetary corporations, on untimely closing of loans.It mentioned foreclosures fees can not fall inside the ambit of service below banking and different monetary providers as outlined below the provisions of the Finance Act. The providers attracted a 12% tax, as per the provisions.The decision got here within the case of Chennai-based Repco House Finance Ltd., which supplies housing loans to clients and is registered with the Service Tax Division for cost of service tax on banking and different monetary providers.The Inner Audit Group of the Service Tax Commissionerate for the interval commencing from October 2004 as much as June 2007, observed that Repco had proven revenue on fees obtained from purchasers for foreclosures of loans below the top ― miscellaneous revenue, however had not paid service tax to the extent of ₹20,50,399/- leviable on such fees collected by it from the shoppers for untimely termination of loans.The Joint Commissioner of the Providers Tax Division had issued a requirement discover in 2009, towards which Repco had moved the Commissioner (Appeals) and obtained a beneficial ruling. The Division moved CESTAT.The competition of the banks and non-banking monetary corporations is that the foreclosures fees should not in direction of any consideration for a service offered by them however are collected to compensate the banks for the breach of the contract because the borrower seeks to make the cost earlier than the agreed time frame, the Tribunal famous. The banks, subsequently, imagine that the foreclosures of the mortgage by making cost earlier than the agreed time can’t be mentioned to be a service below banking and different monetary providers for the reason that foreclosures seeks to finish the present service, it famous whereas rejecting the arguments of the Division that untimely closure is a facility accessible to a borrower at a value in the identical method as a facility for availing a mortgage for a value.This determination is a vital ruling because it has clearly appreciated the excellence between ‘consideration’ and ‘compensation’ which is properly understood below the Contract Act, Okay. Vaitheeswaran, advocate and tax marketing consultant mentioned. The ruling will apply even below GST since a levy of GST is on provide for consideration. As soon as the quantity obtained doesn’t have the character of consideration, GST shouldn’t apply, he added.

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