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Banks Asked To Pay ‘Free Services’ Tax, ATM Transaction Charges Expected

India’s banking industry is currently in a state of dilemma. Banks such as State Bank of India, ICICI Bank, Axis Bank etc. have been asked to pay the ‘free services’ tax provided to customers maintaining a minimum account balance with retrospective consequence. The tax could easily flow into thousands of crores. To deal with this tax, banks could soon start ATM transaction charges, tax for cheques etc.

ATM transaction charges 

The Directorate General of Goods and Services Tax Intelligence (DGGST) has already issued show cause notices. They have been issued to banks, and is expected to be given to all the banks.

According to The Economic Times, a senior official has stated that the tax will be levied for the last five years. It is the period for which past service tax cases can be opened.

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The tax will be calculated after taking into account charges. It will be recovered by banks from customers (who do not maintain minimum account balance). There is a sense of concern among the banks as they can’t retroactively recover the tax from clients and customers.  Banks are probably going to challenge the claims, and take it up to the higher level.

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An official informed to The Economic Times, “Some notices have been issued and some are in the process of being issued. All banks taking these charges would be show caused.”

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According to an Axis Bank spokesperson (reported by The Economic Times), “We are in receipt of the said notice, which we understand, relates to an industry-wide matter. We are, currently, engaged with experts to evaluate the observations made in the SCN (show cause notice).” The emails which have been sent to SBI, ICICI Bank, and HDFC Bank haven’t elicited any response yet. The issued notices also cover the period when service tax was levied, before the launch of GST.

It is being speculated that the total tax liability could amount to Rs. 5-7 crore, but there are fears that it could be more than the speculated amount.

An inquiry has already been initiated by the DGGST. The inquiry is into various bank services to customers through which some charges are collected or come packed free with minimum balance requirement accounts. The fee-based services are ATM transaction charges past a certain value, fuel refund, chequebooks issuing, debit cards etc.

These taxes (like ATM transaction charges) are removed from accounts of privileged customers, and with maintained minimum balance. Under the Service Tax law, these services are a “deemed service”.

It has been assumed by the DGGST that the charge recovered banks when the minimum balance is not maintained as the service value provided by banks in adherence to the service tax rules.

Experts have circled this issue as something which needs to be examined carefully. It needs to be done as it has effects all over the banking sector.  “Banks provide banking services in all cases, including where customers are required to maintain a minimum balance. To break it into various components and infer it to be a distinct service does not seem to be the intention of the law,” said Pratik Jain (indirect tax leader at PwC) to The ET. He also explained the issue, and why it should be understood properly and methodically before proceeding with it.

It seems that the banks are in a dilemma. But in reality, the consumers will be on the receiving end of the burden. That is if service tax needs to be paid for the past period.


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