A customer enters an HDFC Bank branch in Mumbai. Alongside is an advertisement of Kotak Mahindra Bank. (Photographer: Dhiraj Singh/Bloomberg)

Banks Grapple With More Than Rs 15,000-Crore Tax Demand On Free Services

India asked about 19 banks to pay more than Rs 15,000 crore tax on free services provided to customers who maintain a minimum account balance, four officials with direct knowledge of the matter said, even after the government clarified that these services are not taxable.

The government asked banks to pay the tax retrospectively for the last five years, two of the four people quoted above said requesting anonymity. The principal amount of Rs 15,000 crore, they said, will increase to about Rs 35,000 crore if interest and penalty is added to it.

The highest tax liability notice of about Rs 6,500 crore has been served on HDFC Bank Ltd. while ICICI Bank Ltd. and Axis Bank Ltd. have been asked to pay Rs 3,500 crore and about Rs 2,500 crore, respectively. The demand doesn’t include penalty and interest, they said.

Other banks that have been served notices are:

Free services provided by banks to customers who maintain a minimum account balance will not be liable to pay goods and services tax, the government had clarified in June. That came after the Directorate General of Goods and Services Tax Intelligence had issued show-cause notices to the lenders.

A few of these lenders, according to the two officials quoted above, received the notices a month ago. Data from about seven other banks are being collected by the directorate, they said.

The tax, according to the notices, will be levied on the commitment or agreement that a bank signs with customers to provide certain services if they maintain a specific amount, the two officials quoted above and representing banks said. The tax value will be calculated on the penalty a bank levies for not maintaining the minimum balance.

For example, if Rs 100 is the penalty for not maintaining the minimum balance of Rs 1,000, GST at 18 percent will have to be paid for all the accounts, including the ones maintaining the balance. Rs 100 will be considered as the value for providing the free service.

Abhishek Jain, an indirect tax partner at EY India, said both the service tax and GST regime do not provide for tax on free services.

Sumit Lunker, an indirect tax partner at PwC India, agreed. “There is no justifiable ground to demand service tax on free services provided by banks to the customers,” he told BloombergQuint. “Commitment to provide a service cannot be taxable.”

HDFC Bank, ICICI Bank, State Bank of India, Kotak Mahindra Bank, YES Bank and DBS Bank didn’t respond to BloombergQuint’s emailed queries.

An Axis Bank spokesperson said that the issue is not particular to them, and the tax authorities had raised certain queries. The bank is proactively cooperating with the tax authorities and is in the process of replying to such queries.

The Indian Banks Association discussed the matter with Finance Ministry officials, one of the people quoted earlier said.

While VG Kannan, chairman of the lobby representing lenders, didn’t confirm that, he said the IBA will approach the government to not tax free services provided by banks.

Customers To Pay More?

If the banks are charged for these services, the customers may have to pay a higher tax for holding a minimum balance account.

“It will be a big irony,” said PwC India’s Lunker. “If banks pass on these charges to customers, one who maintains balance, and one who doesn’t, both will have to pay the same fee and tax.”

The move, he said, will affect the common man and discourage the use of banking channels. “Customers will not prefer to maintain balance with banks, eroding money flow in formal channels.”