Senior banking industry sources confirmed that they had earlier received some "feelers" from the government about the feasibility and operational aspects of this budget proposal. With banks' total service income in the region of Rs 10,000 crore, the finance minister may pocket Rs 200 crore with the proposed move.

IBA officials said that this service tax will be very similar to Tax Deductible at Source, but bank earnings on account of speculative and trading activities like foreign exchange transactions are likely to be kept out of its purview. Though bank balance sheets are unlikely to take a hit onthis count -- they will ultimately pass on this tax to the end-users -- but with banks having to shell out annual dividends and a 10 per cent dividend tax towards the Centre kitty every year, this additional tax burden may not go down well with them. There is another operational hiccup: In case this service tax comes into effect, banks would prefer that only some service charges should be hiked, instead of a 2 per cent hike across the board. The final decision on this is eagerly awaited by the industry.

Surprisingly, this move comes close on the heels of IBA memorandum requesting the government to ease the tax burden on the banks by exempting them from 10 per cent dividend tax. IBA has also sought a waiver on 2 per cent interest tax currently charged on the banks' borrowers.

In fact, bankers feel that they already face a crushing tax burden and have been clamouring for some concessions for the industry, including those under section 36(1)(viii) of the I-T Act (to the extent of 40 per cent), on theirincome from long-term finance for development of infrastructure facilities.