Section 65(105)(zm) of the Finance Act, 1994 – Banking and Other Financial Services – Service tax on Commitment charges collected by Banks

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Letter [F.No. 137/62/2011 - Service Tax], dated 21-10-2011

The C & A G of India has pointed out that Banks are recovering Commitment charges for keeping available the undisbursed balance of a loan commitment and they are in the nature of charges for services provided. In this regard attention is invited to the letter F. No. 345/6/2008-TRU, dated 11.6.2008 (Annexure) wherein it has been clarified that any amount collected by the service provider on account of lending is either interest or service charges. Pre-closure/fore-closure charges are not charges collected for delayed payment. These charges not being ‘interest’ are to be appropriately treated as consideration for the services provided and accordingly leviable to service tax under Section 65(105)(zm).

2. Applying the same principle it is clarified that commitment charges are not in the nature of interest. Rather, they are directly linked to the provision of service and therefore are to be included in the taxable value for payment of service tax.

3. It is requested that immediate action may please be taken to protect the Government Revenue on these lines