Service tax demands from the 13 banks are only for premium accounts which require a customer to maintain a hefty balance or fixed deposit, according to government sources.

SCN issued

The matter, related to tax on minimum balance, is pending in Delhi High Court, and has been listed for next hearing on November 14. It dates back to March-April 2010, when the government issued show-cause notice (SCN) to nine private and foreign banks – HDFC Bank, Kotak Mahindra/ING Vysya Bank, Axis Bank, Deutsche Bank, HSBC Bank, ICICI Bank, Citibank, Standard Chartered Bank and YES Bank – involving a service tax of ₹15,581.07 crore.

SCN was also issued to four public sector banks – SBI, Bank of Baroda, Punjab National Bank and Corporation Bank – involving a service tax of ₹2,480.62 crore for the period up to March-June 2017. The government made the demand from banks for “treating the commitment of customers to maintain minimum average balance (MAB) in bank accounts as a consideration for banking facilities provided free”.

However, rather than responding to the SCN, banks moved the High Court, which admitted the petition, but took note of the assurance by petitioners that they will reply to the SCN by August 31, 2019. The government and GST Council have to respond to the court within a time-frame of eight weeks from July 8

According to sources, there is an impression that this tax demand is for all kinds of bank accounts, including Basic Saving Bank Deposit Account (BSBDA or Jan Dhan account), but it is not true and only concerns premium accounts.

“Banks sell their accounts to customers as premium products with various features, including some free services, but in the process, they avoid service tax hugely,” an official said.

For example, banks offer locker facility for a rent of ₹2,000 per annum, and if a customer maintains a minimum balance of ₹1.25 lakh or a fixed deposit of ₹6.25 lakh with the bank, he will be offered the locker facility free, along with other services. Here, if a customer is non-premium and avails locker facility for rent, the bank would collect service tax at the rate of 18 per cent on the annual locker rent and pay ₹360 to the government.

However, if the bank takes this fixed deposit and the High Minimum Balance route and offers a free locker facility, there will be no service tax due to the government as no upfront consideration was charged for this service.

Another source said that in the same manner, banks or card companies can offer many other services and avoid GST, such as free lounge facilities, check deposit service, and waive ATM charges/debit card fees for these premium account holders.

The other non-premium account holders have to pay not only for these services but also for service tax/GST.