The Supreme Court recently issued a crucial ruling on service tax for banks, concluding that card-issuing banks do not have to pay additional service tax on interchange fees if tax has already been paid on the Merchant Discount Rate (MDR).
What Was the Case About?
A three-judge bench consisting of Justice Sanjiv Khanna, Justice Sanjay Kumar, and Justice R. Mahadevan clarified that the government has already received the full service tax on the MDR amount, so there is no loss of revenue. This decision came as the Court addressed the Revenue Department’s argument that the acquiring bank should pay service tax on the MDR after deducting the interchange fee, while the issuing bank should pay tax on the interchange fee separately. The Court disagreed with this view.
Background of the Case
The three-judge bench’s opinion came after a split decision in 2021 by Justices K.M. Joseph and S. Ravindra Bhat, which required further interpretation. The current bench supported Justice Ravindra Bhat’s view, based on Section 65(33a) of the Finance Act, 1994, which aims to expand the scope of credit card services under the tax net. According to Justice Bhat, Section 65(33a) includes both the issuing and acquiring banks in its coverage of credit card-related services.
How MDR and Interchange Fees Are Treated
Justice Bhat explained that the MDR includes the acquiring bank fee, interchange fee, and platform fee and is charged initially by the acquiring bank. Since the interchange fee is part of the MDR, it has already been covered in the service tax. Therefore, the Court confirmed that the service tax on the MDR subsumes the interchange fee, negating any need for separate taxation.
Unified Service for Consumers
The Court clarified that credit card services are seen as a unified service for both the consumer and merchant, with the MDR acting as a comprehensive fee covering multiple aspects of the transaction. As the MDR has already been taxed, this unified approach simplifies tax collection without requiring additional payments.
No Double Taxation and Onus on Banks
The bench also highlighted the importance of preventing double taxation, echoing Justice K.M. Joseph’s earlier views. It noted that Citibank, as the issuing bank, must ensure that the tax payment on the full MDR amount by the acquiring bank is verified. The Court suggested that the Service Tax Department already has access to relevant data, so this verification should have been straightforward.
Final Verdict
In conclusion, the Supreme Court determined that service tax on interchange fees is unnecessary when tax on the MDR has already been paid, bringing clarity to banks and ensuring that double taxation is avoided. This decision affirms a streamlined approach to taxing credit card services while ensuring transparency in tax payments and collections.
