Delhi High Court restricts tax authorities from issuing show cause notices to banks.

The Delhi High Court has restricted the tax authorities from issuing show cause notices to 13 banks for not levying service tax on the commitment to maintain ‘minimum average balance’ (MAB) in bank accounts.

While the government has sought that show cause notices to the banks should prevail, the banks contended that if show cause notices were allowed, they will have to provision nearly Rs 50,000 crore as tax and penalty in their books as per accounting practices. This will 'wreak havoc on the banking industry,' the banks had argued in court.

“Though we have heard the counsels for the respondents, but we have not been able to find any reply to the first of the aforesaid contentions,” Justices Rajiv Sahai Endlaw and Asha Menon said after hearing both parties on August 28.

“In the circumstances, it is not deemed apposite to alter the interim order,” they said, effectively extending the stay issued by the Court in July 2019. The matter will be heard next on September 11.

Experts said that authorities have created a fictitious tax demand on services that have been provided free of cost by overstretching the reach of legal provisions. “Taxing any part of services without consideration, would set a wrong jurisprudence, which would have a rollover effect in goods and service tax (GST) also,” said Rajat Mohan, senior partner at AMRG Associates.

In July last year, the tax authorities had issued notices to 13 banks to pay service tax on minimum balance, amounting to Rs 38,000 crore, for “treating the commitment of customers to maintain MAB in bank accounts as a consideration for banking facilities provided free".

The banks, including State Bank of India, Punjab National Bank, Yes Bank, HDFC, Hong Kong and Shanghai Bank among others approached the Delhi High Court for relief. HDFC Bank Limited was reported to have been facing a penalty of up to Rs 18,000 crore.

They had claimed that the government had arbitrarily decided on the service tax to be charged from them by multiplying the penalty imposed by the banks with the total number of accounts held with the bank. The show-cause notices issued by the government had been stayed till further hearing.