Money & Banking

Service tax on monthly average balance:Banks fear ₹50,000-crore provision

Shishir Sinha New Delhi | Updated on August 31, 2020 Published on August 31, 2020

HC extends stay on Tax Dept demand

Banks have pleaded before the Delhi High Court that they would have to make provision for ₹50,000 crore in their account books, if they are held liable to pay tax on services rendered in lieu of Monthly Average Balance (MAB).

Meanwhile, the court has extended the interim stay granted last year and listed the matter for hearing on September 11. The matter relates to the Tax Department’s showcause notice with respect to service tax dues amounting to approximately ₹18,000 crore in March-April, 2018. A rough estimate takes the total amount to ₹50,000 crore if interest and penalty and more banks are included.

Initially, demands were raised against four public sector banks (SBI, PNB, BOB and Corporation Bank) and nine private sector/foreign banks (HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra/ING Vyasa Bank, YES Bank, Deutsche Bank, HSBC Bank, Citi Bank and Standard Chartered Bank). Later, a similar notice was served on Jammu & Kashmir Bank, which also moved the Delhi High Court. Similar petitions have been filed in other High Courts also.

The latest hearing on the matter was on August 28. According to the order, now uploaded, lawyers for the banks pointed out that if the order holds the petitioners liable to pay service tax together with penalty, it is likely to entail a demand of over ₹50,000 crore.

Though banks, according to the accounting practices, are not required to pay the said amount on the basis of the interim order of the court, they will be required to make a provision in their books of accounts, “wreaking havoc on the banking industry,” they said.

The Tax Department made the demand from banks for “treating the commitment of customers to maintain MAB in bank accounts as a consideration for banking facilities provided free.”

Premium accounts

According to sources, the tax demand did not involve the bank accounts described as Basic Savings Bank Deposit Account (BSBDA) or Jan Dhan account. The tax demand only included premium accounts which require a customer to maintain a hefty balance or fixed deposit. However, vested interests lobbied to create a perception as if all the minimum average balance is being made taxable for service tax/GST, the sources added.

Sources in the Tax Department said banks sell their accounts to customers as premium products with various features, including some free services, but in the process, they avoid huge service tax. 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 himself of 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 is charged for this service, sources explained.

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Published on August 31, 2020
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