AUGUST 19, 2014

By Amit Bothra

BUDGET 2014 has brought services provided by a recovery agent to a banking company, financial institution or a non-banking financial company under the reverse charge mechanism. [Notification 10/2014-ST refers]

This amendment was made effective with effect from 11 July 2014 and the liability to discharge service tax on such services is notified to be on the specified service recipient (ie. the bank, financial institution, non-banking financial company).

These recipientstypically appoint various agents like collection agents, recovery agents in order to collect/recover the loan amount from the borrowers. The term ‘recovery agent' has not been defined in the service tax law. In common parlance, the term ‘recovery' means to find or regain possession of, regain control of, secure by way of a legal process . Hence, recovery agents can be understood to mean an individual who has the power of recovering from delinquent customers or who takes action to force the recovery. In distinction, collection agents are agents collecting dues from the customer on behalf of another company. They provide services in respect to regular debtor recovery as well as for bad debts.

Hence, it becomes essential to understand the difference between services provided by a collection agent and those provided by a recovery agent.

Prior to the introduction of negative list, such distinction between recovery agents and collection agents was of no relevance as services provided by both the types of agents to all recipients wascovered under the ambit of the service tax law and the liability to discharge such tax was on the service provider (ie. on such agent). However, at the time of introduction of the recovery agent's services, the budgetary clarification issued made a reference to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act, 2002 (‘SARFAESI'). The budgetary TRU (M.F. (D.R.) letter D.O.F. No. 334/4/2006) dated 28 February 2006 stated that:

"Recovery Agent

Under Securities and Reconstruction of Financial Assets and Enforcement of Security Act, 2002 and the relevant rules made thereunder, banks and other financial institutions appoint recovery agents for recovery of due amounts.”

Further, from a review of SARFAESI and related RBI regulations it emerges that -

1.  Recovery proceedings can be initiated where there has been a default in repayment of the secured debt or any instalment thereof and such account has been classified as NPA;

2. A notice has been given in writing to the borrower to discharge his liabilities.

3.  The recovery agent is required to attend a certificate course and clear an all India examination conducted by the India Institute of Banking and Finance (IIBF).

It appears that recovery agents appointed by a bank are required to satisfy all the conditions as laid down by the SARFAESI Act as well as hold a certificate issued by the IIBF. The amendment should, therefore,apply only in respect to services in relation to recovery of bad debts and payment defaults and not in relation to other collection services.

Another issue that merits discussion is the point of taxation post 11 July 2014 for recovery agent services. Where the invoice has been issued prior to 11 July 2014the question would be whether the point of taxation is to be determined based on Rule 7 or under Rule 3 of the Point of Taxation Rules, 2011. Here, in respect of invoices raised prior to the amendment of the provision the point of taxation should be determined based on Rule 3 and a re-determination of point of taxation in the hands of the recipient is not warranted.

Recovery agent services provided to service recipients other than a banking company, financial institution or a non-banking financial company would remain taxable in the hands of the recovery agent even after this amendment.

This provision will increase the credit losses to banks and financial institutions that are required to pay an amount of 50% of the credit availed, especially because most of the service providers (recovery agents) earned fees below the threshold limit of 10 lakhs.

(The author is Senior Manager, E&Y. Contribution by: Divyesh Lapsiwala, Aditi Maheswari)