CREDIT RATING AGENCIES
Date of Introduction: 16.10.1998 vide Notification No.53/98-ST dt. 07.10.1998
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 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.
(Section 65(21) of Finance Act, 1994 as amended)
Taxable events and scope of service:
Taxable service provided to a client, by a credit rating agency in relation to credit rating of any financial obligation, instrument or security.
(Section 65(72)(x) of Finance Act, 1994 as amended)
The credit rating agencies operating in India 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 benchmark ratings.
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.
(Ministry’s F.No.B-11/3/98-TRU dt.07.10.1998)
Value of Taxable Service:
Value of taxable service shall be the gross amount charged by the service provider for such service rendered by him. (Section 67 Finance Act, 1994 as amended)
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 standardized 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 fees 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 is recognized 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.
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 and 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.
(Ministry’s F.No.B-11/3/98-TRU dt. 07.10.1998)
Exemption and Exclusion:
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 customized services on say business houses and capital markets, indexing services and information services such as privatization policy for infrastructure projects, macro studies of infra-structure sector, implication of government policy in respect of any sector, financial modeling, 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 gamut of service as on the services of credit ratings. (Ministry’s F.No.B-11/3/98-TRU dt.07.10.1998)
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