Service tax: Govt mulls out-of-court deal to resolve issue with banks

New Delhi (IANS) The government may be inclined for an out-of-court settlement in its dispute with banks over unpaid service tax dues to the tune of Rs 38,000 crore with officials indicating a more flexible stance to resolve the outstanding issues.

Sources in the government said that officials in the Finance Ministry may soon meet bankers to thrash out a compromise formula to resolve the issue that has divided the banking industry and pushed it into taking legal recourse.

A meeting proposed last month to resolve the issue could not take place and sources now say that all efforts are being made to organise the banker-official meeting this month so that a compromise is worked out well before the next date of hearing by the Delhi High Court in November. A meeting of bankers with Finance Minister Nirmala Sitharaman is also slated on Friday.

About 13 banks, including State Bank of India and HDFC Bank, moved Delhi High court early last month against a government demand for service tax to the tune of Rs 38,000 crore. Their claim is that the government decision is arbitrary and the amount has been calculated by multiplying penalty with the total number of accounts held with the respective banks resulting in big increase in tax demand.

Other banks in the petition include Punjab National Bank, Yes Bank and Hong Kong and Shanghai Bank, among others.

The government made the service tax demand for "treating the commitment of the customers to maintain minimum average balance (MAB) in bank accounts as a consideration for banking facilities provided for free".

Though the demand is of Rs 38,000 crore, sources said that the total amount could reach up to Rs 60,000 crore if interest and penalty are both included. Of the current demand, HDFC Bank itself is facing a penalty of up to Rs 18,000 crore.

"The stakes are high and has the potential to put the banking segment under prolonged periods of disruption. Coming at a time when the NPA issues are getting resolved, the government is unwilling to risk further and may work out an out-of-court settlement," said a source privy to the development. 

At the last hearing on the matter, a division bench comprising Justice S. Muralidhar and Justice Talwant Singh had issued a notice to the Centre, the Central Board of Indirect Taxes and Customs, the Goods and Services Tax Council and other authorities on the petition filed by the banks. The next day of hearing is November 14.

Other than the Delhi High Court, similar petition is pending before the Madurai bench of the Madras High Court. In this case, three banks have approached the court for relief.

As per industry estimates, savings account holders have paid over Rs 10,000 crore to the banks in the last three years as penalties for not maintaining minimum balance in their savings accounts. The penalty for non maintenance of minimum balance also varies from bank to bank.