Government May Withdraw Tax Demand On Free Banking Services

In the face of considerable opposition from banks and their customers, the government may withdraw its demand that banks pay service tax on free services provided to customers.

This withdrawal of tax notices issued to banks could likely be done by issuing a circular stating that free services should not be taxable, two senior government officials told BloombergQuint on condition of anonymity.

The government may also consider adding these services to the list of items exempt from the Goods and Services Tax, one of the two officials quoted above said.

The Economic Times newspaper was the first to report that show cause notices had been issued by the Directorate General of Goods and Services Tax Intelligence asking banks to pay back-taxes on free services provided by them since 2012. Another news report estimated the total tax liability at Rs 45,000 crore.

Under the service tax regime (before GST was introduced) it was presumed such services were exempt from tax even though the law did not explicitly provide so, said the first official quoted above.

Amit Sarkar, head of indirect tax at BDO India told BloombergQuint that free banking services were not taxable under service tax law as there was no "gross amount charged" for such services.

But now the tax department's taken the view that these services, provided to customers who maintain a minimum balance, are not free. By maintaining a minimum balance the customer is paying a consideration of sorts to the bank, explained Badri Narayanan, partner at tax firm Lakshmikumaran & Sridharan.

“The value of these services are sought to be calculated by what the bank charges other customers who do not keep the minimum balance,” Narayanan said.

While the notices have generated considerable controversy, it turns out they were issued by the DGGSTI without consulting the Department of Revenue under the Ministry of Finance, according to the second official quoted above. Faced with opposition from banks and customers, the department is now considering the withdrawal these notices, he said.

If the Central Board of Indirect Taxes and Customs issues a directive these show cause notices can be dropped, said Sarkar.