You know you are misinterpreting that section of the code, because this has been explained to you many times. What you are quoting is to cover cases where the interest rate includes additional service fees -- only those additional fees would be subject to the tax, not the entire interest rate.
For example, I've owned a mutual fund where there was an annual 0.75% management fee removed from the rate of return (or taken out of the principal in the cases of a loss or negligible gain -- but this particular fund returned about 14% a year at the time) -- that fee would be subject to tax, but not the rest of the interest earned (in this case) or paid.
His sole purpose is to turn people away from finding out about the nrst. He has a vested interest in keeping the current income tax mess in place. He likes it. Ask him.