Customers May Have To Pay More For Services As Banks Recover Retrospective Tax

Banking may become costlier as banks may not only ask customers with minimum-balance accounts to pay up for free services like chequebooks and ATM cards received in the last five years but also increase charges across the board to pay a retrospective tax.

That's because the Prime Minister's Office refused to intervene after the Indian Banks' Association sought help against the demand to pay Goods and Services Tax on such services, an official aware of the matter BloombergQuint requesting anonymity. The PMO asked banks to respond to show-cause notices issued by the Directorate General of Goods and Services Tax Intelligence, the official said.

Banks charge customers with no-frills or zero-balance accounts for services like cheque books and ATM cards, but provide them free to those who have accounts that require a minimum balance. The taxman contends that the banks need to pay tax on such a free service provided in the past. The principal amount sought from all banks put together is Rs 15,000 crore and is expected to increase to about Rs 35,000 crore if interest and penalty is added.

The Indian Banks' Association, a lobby for all banks, held several meetings with the Finance Ministry on the issue. Its representatives met PMO officials this week and the PMO seems to be keen on recovering the tax, said the official quoted earlier who was present in the meeting.

A PMO spokesman didn't respond to calls made on his mobile number.

Banks informed the Reserve Bank of India that they will be recovering the tax from customers for the last five years, the official quoted earlier said.

VG Kannan, chief executive officer of the association, confirmed to BloombergQuint that “banks are planning to recover service tax and GST from customers and pay the government”.

‘Costlier Services'

Banks are also considering to increase charges for services across the board to recover the tax, another person representing the banks said requesting anonymity. It will be difficult to recover the huge amount from just minimum balance account holders, the person said.

The highest tax liability notice of about Rs 6,500 crore was served on HDFC Bank Ltd., while ICICI Bank Ltd., Axis Bank Ltd and State Bank of India Ltd. were asked to pay Rs 3,500 crore, Rs 2,500 crore, around Rs 1,000 crore, respectively, BloombergQuint earlier reported.

An HDFC Bank spokesperson said the bank has been in touch with the association, which is taking up the issue with the government. The spokesperson didn't comment if the bank plans to increase charges for all customers.

ICICI Bank, Axis Bank and SBI have yet to respond to emailed queries.

Banks won't bear the cost of service tax as it will hit their profits, said Sumit Lunker, an indirect tax partner at PwC India. “They will look at recovering it from minimum balance customers. If they cannot reach the customers, they will increase charges for other services,” Lunker told BloombergQuint. “So ultimately, banking services will become costly for the common man.”