Money & Banking

Tax on free services: PMO set to wade into ₹40,000 cr spat between banks, revenue dept

K Ram Kumar Mumbai | Updated on November 25, 2018

The RBI has extended the timeline to meet this last leg of CCB requirement—another 0.625 per cent by March 2019.   -  REUTERS

May convene meeting this week

With banks staring at a massive tax outgo of ₹40,000 crore on free services provided to customers to maintain a minimum balance, and revenue authorities in no mood to give up their claims, the Prime Minister’s Office is set to convene a meeting this week between bank chiefs and top Finance Ministry officials to resolve the issue.

Bankers and officials of key Finance Ministry Departments — the Department of Revenue (DoR) and the Department of Financial Services (DFS) — could not achieve any breakthrough at a meeting in June. “The issue has now been escalated to the Prime Minister’s Office (PMO) for suitable intervention and resolution,” said a banker aware of developments.

The lingering issue

Revenue authorities want banks to cough up tax (service tax plus penal interest plus penalty) for the 2012-2017 period. Bankers warn that if they have to pay the tax, it could lead to withdrawal of free banking services, including to those who have opened accounts under the NDA government’s pet financial inclusion programme (Pradhan Mantri Jan Dhan Yojana).

In a bid to rake in more taxes, the revenue authorities have assessed the value of free services provided to account holders maintaining a minimum balance and asked banks to pay tax. It appears their view is that provision of free services is leading to denial of revenue to the exchequer.

Banks, to an extent, provide free services, including cheque leaves, ATM withdrawals, cash deposits, monthly account and locker visits.

According to S Ravi, Practising Chartered Accountant and banking expert: “Free services are ensuring that more unbanked people can benefit from banking services. If, on the one hand, you encourage more people to embrace banking, and on the other hand free services are taxed, then banks will have to pass on the increased costs to customers.

“The intent of the government via PMJDY has been to provide banking access to people across the country. Tax on free services provided by banks will discourage opening of new accounts.”

Bankers say the PMO needs to settle festering issue once and for all.

Published on November 25, 2018

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