Bank Not Required to Pay Separate Service Tax on Credit Card Interchange Fee If Full MDR Tax Is Already Paid
The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that a bank does not have to pay service tax separately on the interchange fee earned from credit card transactions if it has already paid service tax on the full Merchant Discount Rate (MDR).
The case involved HDFC Bank Ltd. The Department had demanded service tax from the bank on interchange fees earned between September 2006 and March 2016. It argued that the interchange fee was a payment received by the bank for providing credit card-related services and was therefore subject to service tax.
What is MDR and Interchange Fee?
When a customer uses a credit card to make a payment, the shop or merchant pays a fee called the Merchant Discount Rate (MDR). This fee is collected by the acquiring bank, which processes the card payment.
A part of the MDR is then given to the bank that issued the customer’s credit card. This amount is called the interchange fee.
For example, if a merchant pays ₹100 as MDR, a portion of that amount may go to the credit card issuing bank as an interchange fee.
What did HDFC Bank argue?
HDFC Bank argued that it had already paid service tax on the entire MDR. Therefore, the interchange fee, which is only a portion of the MDR, should not be taxed again separately.
The bank also relied on an earlier Supreme Court judgment in the case of Commissioner of GST and Central Excise v. Citibank N.A. In that case, the Supreme Court had held that service tax was not separately payable on interchange fees when service tax had already been paid on the entire MDR.
What did CESTAT decide?
The CESTAT agreed with HDFC Bank and followed the Supreme Court’s earlier ruling.
The Tribunal held that service tax cannot be demanded separately on the interchange fee when service tax has already been paid on the entire MDR. In simple terms, the same amount cannot be subjected to service tax twice merely because a part of the MDR is later transferred to the credit card issuing bank as an interchange fee.
The Tribunal therefore set aside the service tax demands raised against HDFC Bank, along with the related interest and penalties.
CESTAT also allowed all five appeals filed by HDFC Bank and granted the bank consequential relief as per law.
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