No Service Tax on Free Banking Facilities: Karnataka HC Rules MAB Maintenance Does Not Constitute Non-Monetary Consideration [Read Order]

The Karnataka High Court in a major relief to the banking industry has declared that a customer’s promise to maintain a Minimum Average Balance (MAB) in his account is not “non-monetary consideration” for the banking facilities extended to him. The Court unequivocally dismissed the Revenue Department’s attempt to characterise the routine maintenance of MAB as a taxable “declared service”, ruling that free banking services availed by complying clients cannot be subjected to pre-GST service tax claims.

In quashing show cause orders against large public sector banks, the High Court has held that the penal fines imposed for non-maintenance of MAB are mere deterrents under the contract and cannot be treated as presumed consideration for provision of banking services.

The High Court heard a bunch of writ petitions brought by Canara Bank (formerly Syndicate Bank), Bank of Baroda (formerly Vijaya Bank) and Karnataka Bank. The petitions dispute show cause notices (SCNs) issued by the Directorate General of GST Intelligence for recovery of service tax for periods up to June 30, 2017. The tax agency asserted that the banks had not paid service tax on a range of facilities extended to savings and current account holders.

The Revenue’s case hinged on a unique reading of the law. It maintained that the banking services supplied to the clients were supported by “non-monetary consideration” in the form of the undertaking of the customer to maintain a predetermined Minimum Average Balance (MAB). The department also noted that the banks charged a penalty when customers failed to maintain the MAB but continued to supply services.

This was categorised by the Revenue as a “declared service” under Section 66E(e) of the Finance Act, 2012 where a bank “agreed to an obligation to do an act”and the deemed consideration was sought to be valued on the basis of the penalty costs imposed for non-compliance under Section 67 of the Act.

Senior counsel G. Shivadass, appearing for the petitioners, strongly opposed this view. They maintained that retention of MAB was merely a usual term of the banking contract and was not a payment for services. When a customer kept the MAB, no consideration was charged for the normal banking amenities and hence no service tax could be assessed. The banks said the penalty for not holding MAB was a deterrent against breaching a contractual term, and was not a fee for providing a service. They extensively quoted CBIC Circular No. 178/10/2022-GST clarifying the taxability of liquidated damages and penalties.

Justice S.R. Krishna Kumar, in a careful study of the legislative provisions and the circular, concurred with the banks. The Court took significant guidance from the Circular’s pronouncement that money passing from one party to another does not raise a presumption of an agreement to do or not to conduct an act.

The Court emphasised that penalties such as that for failure to maintain MAB are monies recovered for not tolerating a breach of contract and are designed to deter non-performance. They are merely “events” in a contract and not compensation for a separate provision of service. The judgement points out that the contract to maintain an MAB is not a standalone agreement where the bank promises to “tolerate” a low balance in return for the penalty fee.

The High Court decided that the impugned SCNs were in violation of the legislative provisions and the executive circulars. The Court dismissed the show cause notices and held that the free banking facilities offered to MAB-compliant consumers were not liable to service tax, thereby providing substantial relief to the banking sector.

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