GST likely on banks 'free' services as they are actually 'charging' clients

Notices under older tax regime likely to be withdrawn but officials say levy's rationale remains as before

The so-called ‘free services’ offered by banks to customers are liable for goods and services tax (GST), officials believe, even as notices sent to lenders for taxing these services under the older regime are likely to be withdrawn.

According to officials, banks are not offering ‘free services’ but actually charging customers by asking them to maintain a minimum account balance. “In business nothing is free. They penalise you for not maintaining a minimum balance because from the interest of that money you maintain, they service you. It is not free. They (say they) give four cheque books a year, free cash withdrawal from automated teller machines (ATMs) and personalised service facility, among others. It basically means they offer a chargeable service,” said a key official.

The official added that banks must charge GST on these ‘free services’. “They will need to. If they have not, they will get a demand for it. They are all taxable services,” the official said.

This comes after Directorate General of Goods and Services Tax Intelligence (DGGSTI) offices had issued notices to at least 20 private, multinational and public sector banks, to explain why they should not pay service tax, penalty and interest on ‘free services’ offered to customers between July 2012 and June 2017, a period prior to roll-out of GST.

This might not hold stand the test, as it does not relate to fraud or concealment of income, according to an official. Which might lead to an order for withdrawal of the notices sent under the older tax regime.

“Since all banks are affected in the same way, we will club all the cases and it will go to a common adjudicating authority,” said another official.

The Department of Financial Services (DFS) has opposed the move to tax banks for providing these ‘free services’ to customers. DGGSTI was in the process of issuing similar notices to other banks when DFS asked the revenue department to not go ahead.

Another official said there seemed to be a lack of understanding among some. “Banks are bound to provide certain services to customers. More, it is hard to put a value to such facilities that are free of cost to customers,” he said. 

Every bank specifies a different slab of minimum balance for customers to maintain, based on which ‘free services’ are provided. The tax demand was for customers maintaining a minimum balance in their deposits and availing of free services such as cash withdrawal from ATMs, cheque books, account statements, internet banking, debit cards, and PIN change.

M S Mani, partner at consultants Deloitte India, said: “The charges levied by banks for non-maintenance of specified balances do not appear to be attributable to any services that are provided by the bank. Hence, the need to pay GST requires very close evaluation. Banks would hope their views would be appreciated before any litigation is initiated, as a consultative approach with all stakeholders is essential in such cases where there appear to be divergent viewpoints between industry and the tax authorities.”

At the time of GST implementation last year, United Bank, Karur Vyas Bank and Sumitomo Mitsui Banking Corporation had sought clarity from the then Central Board of Excise and Customs (CBEC) on the levy that might apply on services provided free of cost to customers.

CBEC had promised that guidance notes and a set of (replies to) frequently asked questions (FAQs) on the banking sector was being prepared.

Karur Vysya Bank had asked the CBEC to keep concessions offered to its employees, such as free ATM withdrawals, waiver of penalty for non-maintenance of minimum balances and other such services out of the ambit of the GST, as “such facilities are not quantifiable and are of low value”. The CBEC had replied that “the amount of such service has to be quantified” and it would not come under the GST if such concessions to employees were below Rs 50,000 in value.

Allahabad Bank, in a detailed FAQ on GST on its website, says services provided to customers free of cost or at a concessional rate “will be taxable only on the transaction value, that is, the value of the services charged or recovered from customers”.

When contacted, an Indian Banks' Association (IBA) source said the entire taxation issue rests on provision in the GST law - transaction without consideration is liable for levy of tax. 

He said the IBA has communicated with the government seeking clarity on which service from banking sector will come under the GST ambit and what will be the valuation used for it. 

So far, as likely withdrawal of earlier notices is concerned, he said the IBA is yet to hear from the government.

With inputs from Abhijit Lele