Interest on bill discounting facility is exempt from Service tax and interest earned on overdraft and cash credit facility would attract CENVAT credit reversal

This Tax Alert summarizes the decision of the Kolkata Tribunal in the case of UCO Bank, Kolkata v. Commissioner of Service tax, Kolkata [TS-439-Tribunal-2014-ST].

In this case, the assessee, a Public Sector Undertaking bank, was engaged in the provision of lending services as well as bill discounting facilities during the relevant period.

The revenue raised a demand for Service tax on interest in relation to bill discounting facility and also sought to recover an amount under Rule 6(3A) of the CENVAT Credit Rules, 2004 on the grounds that interest on overdraft and cash credit facilities should be included in the exempted turnover as per the formula prescribed in Rule 6(3A).

It was held by the CESTAT that though the value of interest on bill discounting facility cannot be excluded from the value of taxable service, it would still be exempt from levy of Service tax by virtue of Notification no. 29/2004-ST dated 22 September 2004. The CESTAT also held that the interest on overdraft and cash credit facility should be considered while computing the exempted turnover under Rule 6(3A) of the CCR, as it is covered under the definition of "exempted services".

The decision of the CESTAT regarding the reversal of CENVAT credit with respect to interest on overdraft and cash credit facilities will have far reaching impact on the banking and financial services industry, for the period prior to April 2011.