Home / Industry / Govt may ask banks for at least $295 million in back-taxes

The Indian government plans to issue demands for back-taxes amounting to a total of at least Rs20 billion ($295 million) from about a dozen banks as part of a government investigation into services levies, according to two officials with direct knowledge of the matter.

The government will issue orders for payment as early as April, the officials said, asking not to be identified because the information isn’t public. The total amount of tax demands may reach more than Rs100 billion through 2016 as the government probe widens to include all of India’s roughly 100 lenders, the officials said.

Authorities are demanding that India’s banks pay taxes on services they claim were rendered to customers who maintained accounts above minimum balances, which qualified them for perks like unlimited transactions without fees, free ATM cash withdrawals and complimentary debit cards, the officials said. The government is calculating the amount owed based on the rates that banks charged customers who didn’t maintain such minimum balances for similar services over the past three years, the officials said.

The government says banks are liable for the tax because they impose fines or hidden costs on customers who fail to maintain a minimum balance, and therefore don’t suffer any losses, according to the officials. In statements to Bloomberg on Monday, several banks named by officials rejected any notion that they were evading service taxes and said they were fully compliant with India’s regulations.

The tax demands affect the entire industry, and banks will probably join together to challenge them in court, according to two executives in the sector, who asked not to be identified because they were not authorized to speak to the media.

The notices will be backdated to 2012, when India made it mandatory to tax almost all services, and the government expects to recover all the dues by the end of March 2017, the officials said. Banks can dispute the charges, but would have to immediately make provisions on their books.

Apart from the tax amounts allegedly owed, the banks will also be charged 30 percent interest and a penalty of 15 percent, the officials said. If they fail to make the payments within a month of receiving the notice, the penalty could rise to as high as 100 percent, they said.

ICICI Bank Ltd. and HDFC Bank Ltd. will be asked to pay Rs5 billion rupees, the officials said. Kotak Mahindra Bank Ltd., Axis Bank Ltd., Yes Bank Ltd., Citigroup Inc., Deutsche Bank AG, and HSBC Holdings Plc will also receive demands, the officials said.

Kotak Mahindra Bank is complying with requests for information from service-tax authorities, spokesman Rohit Rao said in an e-mail. He called it a “routine matter" and said authorities have made no investigation or allegation of service- tax evasion against the bank.

Yes Bank said it has robust policies to ensure compliance with all regulatory guidelines. “There is no investigation and there is no evasion of any form," it said in a statement to Bloomberg.

Axis Bank pays the government on “all taxable services provided by the bank, including charges collected in respect of non-maintenance of average balance," Axis Bank spokesperson Sherin Antony in an e-mail. “The bank is fully compliant with the applicable service-tax legislation. There is no investigation by the tax authorities in this regard."

Finance Ministry spokesman D.S. Malik declined to comment when reached by phone. Deutsche Bank spokesman Linus Chettiar, Citibank spokesman Debasis Ghosh and ICICI Bank spokesman Kausik Datta also declined to comment.

E-mails to HSBC and HDFC Bank weren’t immediately answered. Mohan V Tanksale, chief executive officer of the Indian Banks’ Association, didn’t immediately answer three calls to his mobile phone.

Prime Minister Narendra Modi is looking for revenue to narrow one of Asia’s widest budget deficits. The demands on banks would be a fresh blow to a sector already saddled with bad loans and would risk reigniting concerns about India’s scattershot tax regime, which has led to disputes with Vodafone Group Plc, Nokia OYJ and Cadbury chocolate maker Mondelez International Inc.

Since taking office, Modi’s government has pledged to avoid bringing new cases under a 2012 law that gives the government power to tax retroactively—even though it has stopped short of repealing it. It also said it was open to a settlement with Vodafone on a $2 billion tax dispute that is heading for arbitration.

The 10-member S&P BSE Bankex Index has lost 10% this year, compared with the almost 5 percent drop in the benchmark S&P BSE Sensex Index. ICICI Bank, India’s largest private sector lender by assets, has fallen 17% in that time.

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