The service tax was announced in the budget and became applicable from 16th July 2001. This tax was in existence but its purview was increased in the budget to include service industry also.
One industry that is going to be adversely affected by the service tax is the domestic credit card industry. The 5% service tax is levied on the joining fee, annual fee and add-on fee. It is even levied on lost card replacement as well as duplicate statements, interest charges and late payment fees, as these services are demarcated as the service to the customers.
Credit card issuing banks are up in arms over the government levy of 5% service tax on credit card charges. According to a report in a leading daily, the Indian Bank Association (IBA) is toying with idea of moving the finance ministry on the issue in addition to the legal options to delay the move. The major point of contention is that service tax is not levied on any bank advances to a customer, which is very similar to credit given by credit card companies to the cardholders, then why this differentiation?
Levying of service tax will increase the transaction cost for the customer if banks decide to pass on the burden of service tax to the customer, which is very likely. The increased cost of transaction could result in lower usage of credit cards in future. This may see payment again shifting back to cash instead of through plastic.
It has taken more than a decade for credit card to catch the investors’ eye. The last couple of years have seen volume of cards and its’ usage grow by a remarkable 20% per annum. The tax will deal a body blow to the spread of the card issuing companies, which is already low. A glance at the cardholding pattern reveals that many of the customers have more than one card. There is every possibility that these customers may now not keep the additional cards, as the cost of owning the additional card will become higher. The levying of service tax on credit card may add to government revenue but there is no doubt that its’ going to prove unfavorable to the growth of domestic card industry for the long term. For consumers its time to choose the credit card carefully and use the card more judiciously.
