Taxing times: GST could increase banking cost for customers

Updated: January 2, 2019 7:07:36 AM

Not resolving the issue of GST on ‘free’ banking services could lead to a substantial increase in the cost of banking services to customers.

Typically, deposits are characterised as temporary in nature, where the amount in question changes hands without there being a sense of permanency to this exchange.

By Vidushi Gupta

Recently, ‘free’ services provided by banks have been under the tax scanner. According to reports, tax authorities have issued notices to banks demanding payment of tax on free services such as ATM withdrawals and issuance of chequebook to customers who maintain a minimum account balance. Tax authorities, reportedly, take the view that this minimum balance amounts to consideration in lieu of the aforementioned services. The services are, therefore, not ‘free’ and are leviable to tax.
Bankers have told FE (‘More GST pain soon: Banks may tax ATM usage, issue of cheque books, additional credit cards’; https://goo.gl/aYDk51) that unless the issue is clarified and notices are retracted, banks are prepared to recover GST (goods and services tax) on such supplies from their customers. Against this backdrop, I analyse the GST law, with an aim to highlight the complexities of this claim.

The cryptic FAQs

Let us start with the frequently asked questions issued by the Central Board of Indirect Taxes and Customs (CBIC) that are said to have clarified the position under the GST regime and brought respite to banks and their customers.
The 32-page FAQs effectively reiterate that supplies made without consideration, between non-related parties, would not be taxed. I believe they are unhelpful for taxpayers and potential taxpayers as they leave crucial questions unanswered. Since notices allege that the services in question are supplies in exchange for consideration paid in the form of a minimum bank balance, the taxability of free services is not the dispute. Instead, the moot question is whether these services are free at all? Or does the maintenance of a minimum balance qualify as consideration? Perhaps the uncertainty would have been addressed if the CBIC had used the FAQs to clear the scope and meaning of the term ‘consideration’.

Interpreting ‘consideration’

Given the lack of jurisprudence on the issue, ‘consideration’ can be interpreted to offer strong arguments both for and against the levy of tax on these services.

Consideration is a mandatory prerequisite for charging GST on transactions between unrelated parties. The term has been defined as payment made ‘in respect of, in response to, or for the inducement of supply’ of services. In my view, the use of this phrase demonstrates the requirement of a nexus between the supply of service and the consideration.

Given that only the account holders who undertake to maintain a minimum account balance are eligible to the ‘free’ services in question, on one hand there is merit to the argument that the two are intrinsically-linked.

However, on the other hand, if banks are able to show that services such as issuance of chequebooks and ATM withdrawals remain uninterrupted—despite the customers’ failure to maintain a minimum balance—a strong case could be made against the absence of a causal link between the service and the alleged consideration.

Further, to shed some light on the legislative intent behind the definition, a reference may be made to its proviso that excludes ‘deposits made in respect of supply’ from its scope. Typically, deposits are characterised as temporary in nature, where the amount in question changes hands without there being a sense of permanency to this exchange.

An analogy can be drawn between deposits and the minimum balance maintained by account holders. Similar to deposits, the amount maintained in bank accounts continues to belong to the account holder. Therefore, it could be argued that the legislature intended for consideration to be a permanent flow, in exchange for the supply, from one person to another.

On the contrary, going by a strict, literal interpretation of the proviso, an alternate interpretation is also possible. It seems that the exception allowed to deposits is specifically limited to those given in respect of a supply. Therefore, there may be merit in the contention that the legislature only intended to carve an exception for deposits made in addition to the primary consideration for a supply. In the case of ‘free’ services offered by banks, one could argue that in the absence of a main supply, the minimum balance maintained by account holders cannot be equated with deposits under the proviso to the definition of consideration.

Based on this analysis, I believe the provisions lead to an ambiguity that raises a genuine concern for the industry and its customers. The issue has various layers of complexities and requires a clarification after a careful, detailed analysis. Given that both sides of the dispute have strong arguments in their favour, the government’s failure to put to rest this issue could cause serious ramifications, including a long-drawn litigation and a substantial increase in the cost of banking services to customers.

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