In a relief to the banking sector, the High Court of Karnataka has ruled that banks are not required to pay service tax merely because customers maintain a Minimum Average Balance (MAB) in their accounts.

The court has said maintaining an MAB is only a condition of operating a bank account and does not amount to payment or “consideration” for any service tax, as the maintenance of an MAB is, in essence, nothing more than the maintenance of a deposit in a bank account.

Petition by banks

Justice S.R. Krishna Kumar passed the order while allowing the petitions filed by Canara Bank, Bank of Baroda, and Karnataka Bank, and consequently quashing the show cause notices issued to them by the Additional Director-General GST (Central Tax-Intelligence) during 2020-21. The GST authorities had issued similar notices to several other banks and financial institutions.

The dispute was related to the pre-GST period up to June 30, 2017, as tax authorities had argued that customers maintaining an MAB effectively provided a form of non-monetary consideration to the banks. According to the notices, the banks offered a basket of services in return for customers agreeing to maintain the prescribed balance, and the value of that “consideration” could be quantified with reference to penalties imposed when customers failed to maintain the minimum balance.

“The act of customers maintaining an MAB cannot be construed, treated, or described as ‘consideration’ towards services provided by the banks,” the court stated while observing that “an MAB is merely a contractual condition, not a payment for services rendered”.

The court also said that the notices issued to the banks are ex facie contrary to various circulars as well as the scheme and mandate of the provisions of the Finance Act.

Contractual stipulation

The maintenance of the stipulated MAB constitutes “merely one of the contractual stipulations governing the relationship between the banks and their customers” and, in the event of a breach or default thereof, the only consequence that ensues is the levy of a penalty, the court said while pointing out that such penal charges can by no stretch of imagination be construed, characterised, categorised or treated as “consideration” flowing to the banks, particularly when no monetary accrual or pecuniary benefit enure to the banks merely by reason of the maintenance of such an MAB.

Significantly, the court said, a customer remains at liberty to withdraw the entire amount standing to the credit of the account, which inexorably leads to the conclusion that the MAB cannot be regarded as “consideration” for the services rendered by the banks.