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Paying in plastic: Watch those bills mount

George Smith Alexander

Credit card issuing banks are up in arms against the government move of levying 5 per cent service tax on credit card charges. The levy came into effect from Monday.

The 5 per cent service tax is levied on the joining fees, annual fees, add on fees, charges levied on lost card replacements as well as duplicate statements and interest charges and late payment fees. The credit card committee of the Indian Banks Association is moving the finance ministry on this issue.

The banks are also examining legal options to stall the move. The government move will deal a body blow to the spread of plastic money use in the country. The banks are likely to pass on the burden of service tax to the customers, thereby increasing transaction costs.

In an earlier meeting with revenue officials, card companies had agreed on a service tax on the joining fees, annual fees and add-on fees as these were the services that could be demarcated as services to the customer, says a senior bank official.

The major grouse of the banks is that the finance charges are levied by banks towards utilisation of a line of credit.

"The service tax is not levied on any advances given by banks to a customer, which could be compared to that of the credit given by credit card companies. The government is trying to make a distinction between credit card purchase and cash purchase. Payments will now shift again to cash payments instead of through plastic thus giving a fillip to the parallel economy (black money). This sort of distinction could stifle the market," a senior executive of a bank said.

Banks are expecting a temporary drop in credit card usage as customers would not be sure on what charges the service tax will be applicable.

The four-million strong Indian card industry is growing at a rate of 20 per cent annually. "Many of the customers have more than one card and it could be possible that they may now not keep additional cards. The move to levy tax may prove detrimental to the government in the long run ," said an executive. Total card spends in the country is around Rs 80 billion annually.

The other major grouse of card members is the required modifications that will have to be made in the billing systems of the banks and the credit card companies. They have asked the ministry to postpone the date to November 1, 2001.

"The queries of card holders will have to be answered on the break-up of the service tax issues. This will take time and it cannot be done overnight," said a senior executive from an Indian bank.

The 5 per cent service tax levied will mostly be passed on to the customers though most banks are still reviewing the implications.

"The banks gain when customers make part payments as the interest is around 2.95 per cent per month. Now with the service tax, it will have to be seen whether customers would be ready to pay the interest charges and the service tax which will be levied on it. There will be a slowdown in card growth," said a senior executive.

A few years ago, the Maharashtra government had tried to levy a one per cent tax on all credit card transactions. At that time, the industry successfully stalled the move.

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