PMO to settle rift between banks, revenue department over tax on free services

The Prime Minister’s Office is mediating a discussion between bank heads and officials from the Finance Ministry this week, to settle their dispute over taxing free banking services,┬áThe Hindu BusinessLine┬áreported.

Revenue authorities have asked banks to pay tax (service tax with penal interest and penalty) for years 2012-2017 on free services provided to customers.

If the banks have to pay their out of this, they may have to shell out around Rs 40,000 crore.

On their part, lenders have warned that this would lead to a withdrawal of free banking services provided to customers, including services to accounts opened under the government’s financial inclusion scheme, Pradhan Mantri Jan Dhan Yojana (PMJDY).

he tax authorities assessed the value of free services that banks provide to account holders who maintain a minimum balance. Wanting to amp up their collections, they asked banks to pay tax on these services.

The authorities are of the opinion that free services provided to customers are leading to a fall in the government’s revenue.

This move may discourage people from opening new accounts and the intent behind schemes like PMJDY will not be fulfilled, S Ravi, practising chartered accountant, told the paper.

Free services provided by banks include cheque leaves, ATM withdrawals, cash deposits, monthly account and locker visits.

“Free services are ensuring that more unbanked people can benefit from banking services. If, on the one hand, you encourage more people to embrace banking, and on the other hand, free services are taxed, then banks will have to pass the increased costs to customers,” Ravi was quoted as saying.

Stakeholders on both sides had a meeting in June but could not reach a middle ground. A source told the paper that the PMO was brought in for suitable intervention and resolution.