Indian Service Tax
Credit Rating Agency
Effective Date: 16/10/1998
Authority: Notification No. 53/98-ST, dt. 7/10/1998 (for full text of Notification see under'Architect').
Rate of Service Tax: 8% from 14/5/2003 (5% upto 13/5/2003). 10% from 10/9/2004 - Cess 2% of 10% = 0.2. Total ST = 10.2%.
Definition
"Credit Rating Agency" means any commercial concern engaged in the business of credit rating of any debt obligation or of any project or programme requiring finance, whether in the form of debt or otherwise, and includes credit rating of any financial obligation, instrument or security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely payment of interest or principal; [Section 65 (34)]
Taxable service: Credit Rating Agency providing service to a client in relation to credit rating of any financial obligation, instrument or security.
Value of taxable service: The gross amount charged by such agency from the client for services rendered in connection with credit rating of any financial obligation, instrument or security in any manner.
Exemptions
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See Chapter on "General Exemptions"
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Specific exemptions
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Information and advisory services
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Analysis of industry in a specific sector
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Financial and business outlook of a company.
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Information services
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Research services
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Bid evaluation
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Implications of Govt. policy
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Indexing services
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Services by a non-credit rating agency'
Person liable to pay: Credit Rating Agency.
Head of Account
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Questions & Answers
Q. 1 What is a Credit Rating Agency?
Ans. "Credit Rating Agency" is a commercial concern engaged in the businessof credit rating of any debt obligation or of any project or programme requiring finance, whether in the form of debt or otherwise, and includes credit rating of any financial obligation, instrument of security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely payment of interest or principal.
Q. 2 What is the taxable service in case of Credit Rating Agencies?
Ans. Taxable service is a service provided to a client, by a credit rating agency in relation to credit rating of any financial obligation, instrument or security.
Q. 3 What is the value of taxable service in case of services provided by Credit Rating Agencies?
Ans. Value of the taxable service in relation to the service provided by a credit rating agency to a client, is the gross amount charged by such agency from the client for services rendered in connection with credit rating of any financial obligation, instrument or security in any manner.
The client wanting to get rated a debt issue being floated by it requires the services of a credit rating agency. For this purpose they enter into a written agreement with a credit rating agency in a standardised format. The agreement specifies the charges for such rating services as well as for regular surveillance on the existing rating, to see whether it needs to be revised or otherwise. The fees of the rating agency are generally expressed as a percentage of the amount of debt sought to be raised. The fee on any assignments are usually paid at the time of entering into an agreement, i.e., in advance. Such amounts are kept as advance against rating fee and are recognised as income only when the rating is assigned. After the rating is given, it is communicated to the client. The rating of any instrument remains under surveillance until the entire debt is repaid. The surveillance is a mandatory exercise for rating agencies. After surveillance, the client is billed as per the agreed fee structure. Service Tax is payable both on the fee received for credit rating of the debt instrument and the surveillance fee.
Q. 4 Is Service tax payable on Information and Advisory services rendered by Credit Rating Agencies?
Ans. No, the information and advisory services, if any, rendered by credit rating agencies would not attract service tax for the reason that taxable services in respect of credit rating agency means service provided to a client only in relation to credit rating of any financial obligation, instrument or security. Services of research and information such as analysis of industries in specific sectors of financial and business aspects of a company, other customised services on say business houses and capital markets, indexing services and information services such as privatisation policy for infrastructure projects, macro studies of infra-structure sector, implication of government policy in respect of any sector, financial modelling, bid evaluation, power purchase agreement, restructuring of state electricity boards, etc are not services 'in relation to' the credit rating of any financial obligation, instrument or security and are hence outside the ambit of service.
Q. 5 Is the Service tax payable on money received by Credit rating Agency for the purpose of Credit Rating assignment, but returned to the client due to any reason subsequently?
Ans. No. The amount received in advance for the service of rating to be provided to the client, is only an advance and the services can be deemed to have been provided only when the rating exercise has been completed and when such rating has been assigned. In case rating is not done, for any reason and the entire amount is returned back to the client,. it cannot be said that services have been rendered and hence service tax is not attracted.
Q. 6 What would be the relevant date for determining the liability for payment of Service Tax?
Ans. The relevant date for determining the service tax liability would be the date when rating has been assigned to a particular instrument. In the case of ongoing projects, where rating has been assigned after the notified date i.e. 16th October, 1998, the service tax would be payable.
Main text of Departmental Circular/TN
[TN No. 116/98-ST, dated 15-10-1998 of Hyderabad Commissionerate)
5.1 As per Section 65(15)* of the Finance Act, 1994, "Credit Rating Agency" means any commercial concern engaged in the business of credit rating of any debt obligation or of any project or programme requiring finance, whether in the form of debt or otherwise, and includes credit rating of any financial obligation, instrument or security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely payment of interest or principal. Basically, rating is an expression of an opinion regarding the ability of the borrower to pay back the amount borrowed by way of a debt. Some of the main credit rating agencies in India are CRISIL, ICRA, CARE and Duffs & Phelps. The credit rating agencies are registered with the Reserve Bank of India. These agencies provide, among others, ratings in respect of corporate bonds, commercial paper, fixed deposits, municipal debt, infrastructure bond, utilities, asset backed securities, structured obligations, toll road bonds, mutual funds etc. All public issues of debt are statutorily required to be rated. These ratings help individual and institutional investors frame their investment policies based on bench mark ratings.
5.2 The client wanting to get rated a debt issue being floated by it requires the services of a credit rating agency. It is understood that for this they enter into a written agreement for which there is a standardised format. The agreement also specifies the charges for such rating services and also specifies the charges for regular surveillance of the existing rating, whether it needs to be revised or otherwise. The fees of the rating agency is generally expressed as a percentage of the amount of debt sought to be raised. The fees on any assignment are usually paid at the time of entering into an agreement i.e. in advance. Such amounts are kept as advance against rating fee and is recognised as income only when the rating is assigned. After the rating is given it is communicated to the client. The rating of any instrument remains under surveillance until the entire debt is repaid. The surveillance is a mandatory exercise for rating agencies. After surveillance the client is billed as per the agreed fee structure. Service tax is payable both on the fees received for credit rating of the debt instrument and the surveillance fees.
5.3 It is clarified that information and advisory services, if any, rendered by credit rating agencies would not attract service tax for the reason that "taxable service" in respect of a credit rating agency means services provided to a client only in relation to credit rating of any financial obligation, instrument or security. Services of research and information such as analysis of industries in specific sectors, of financial and business outlook of a company, other customised services on say business houses and capital markets, indexing services, and information services, such as, privatisation policy for infrastructure projects, macro studies of infrastructure sector, implication of Government policy in respect of any sector, financial modelling, bid evaluation, power purchase agreements, restructuring of SEBs etc. are not services "in relation to" the credit rating of any financial obligation, instrument or security and are hence outside the gamut of service tax on the services of credit rating.
5.4 The amount received in advance for the service of rating to be provided to the client, is only an advance and the services can only deemed to have been provided only when the rating exercise has been completed, i.e. when rating of any instrument has been assigned. In case rating is not done, for any reason, and the entire amount is returned back to the client, it cannot be said that services have been rendered and hence service tax is not attracted. Similarly in the case of ongoing projects, where rating has been done subsequently, the relevant date for determining the service tax liability would be the date when rating has been assigned to a particular instrument.
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