The demand suggests three things, none of which does the revenue department much credit. First, this steep retrospective levy comes at a time when banks are reeling from bad debts of Rs 9.5 trillion and are unlikely to have the wherewithal to service them. Second, the move contradicts repeated promises from the prime minister and the finance minister over the past four years to end the regime of “tax terrorism” that vitiated India’s reputation under the United Progressive Alliance (UPA). The focus of the UPA’s taxation policies was global companies acquiring Indian assets, such as Vodafone, culminating a retrospective tax on capital gains that has embroiled India in multiple international arbitration cases. The National Democratic Alliance’s focus has been on the Indian taxpayer, principally to make good on its resolve to unearth black money. Third, the move to tax free services that banks offer customers is based on unsound logic, however, and betrays an ignorance of the basics of business.
Consider the practical implications. The tax department imputes a value to each free service that a bank offers and argues that it is liable to tax. It is near impossible for any organisation to calculate the value of a free service, that, too, going back six years. Also, it is axiomatic that a free service is a cost to the organisation, not a direct earning — it is the customer who is gaining the value. Besides, offering free services is a critical element of any organisation’s business-building model. Taxing these services amounts to depriving banks of the flexibility to maximise their competitive advantage.
This current controversy also underlines the government’s fundamental inability to understand the basics of doing business. This applies to most regimes in India but is surely ironic for the current one, which has expended much energy on improving India’s Ease of Doing Business rankings. The move to tax free services is of a piece with several other moves of the past four years. The limits imposed on discounting and cashbacks for e-commerce players is one example. The baffling “anti-profiteering” clause in the goods and services tax (GST) administration is another. Not to forget, the delays in processing tax refunds to exporters under the GST — a slip that is eroding India’s competitiveness in global markets.
If the government is keen to burnish its doing business credentials in the run-up to 2019, it will do well to withdraw these notices, which are unlikely to add much to the kitty in any case, given the parlous state of bank finances.
