If the revenue authorities have their way, banks in India may soon face the unwelcome prospect of paying service tax on deposit insurance premium, that too with retrospective effect, i.e., from May 1, 2006. According to RBI data, banks had deposits aggregating around Rs 34,42,000 crore as of end-September 2008. A rough, back-of-the-envelope calculation shows that banks collectively will have to shell out around Rs 4,250 crore towards service tax on deposit insurance for just the first half of the year. The impact on banks could be several times this amount if revenue authorities demand arrears from May 2006. Deposit Insurance & Credit Guarantee Corporation, which is the sole provider of deposit insurance services for banks, has cautioned banks through a circular: “In case Service Tax is applicable on the deposit insurance premium, then all banks may have to pay the same at short notice, over and above the premium being paid as per the relevant rate.” Although it is the DICGC which has to pay the service tax, the levy will eventually have to be borne by the banks. Banks would not only have to make ‘substantial’ provisions towards arrears, if the tax is levied retrospectively, but also pay higher deposit insurance premium going ahead. If revenue authorities should insist, the cost of deposit insurance for banks would also go up from 10 paise for Rs 100 currently, to 11.24 paise. Following the slowdown in indirect tax collections, the revenue authorities are revisiting the rule book with a magnifying glass to unlock new revenue streams to make up for shortfall in collections, said a tax consultant. Roused to action Apparently, sagging revenue collections due to slowing economic activity have roused the Commissionerate of Central Excise and Service Tax, Large Taxpayer Unit, Mumbai, into action. In its communication to the DICGC, the Commissionerate underscored the fact that deposit insurance activity is liable to Service Tax (at 12.36 per cent) with effect from May 1, 2006. Though DICGC is trying to sort out the service tax issue with the Commissionerate, given the sharp fall in the growth rate of indirect tax collections, the latter may not relent. All registered insured banks (commercial banks, including branches of foreign banks in India, regional rural banks, local area banks, and co-operative banks) are required to pay to the DICGC deposit insurance premium at the rate of 10 paise a year for every deposit of Rs 100 at half-yearly intervals. Governed by the DICGC Act, 1961, the corporation insures bank deposits such as savings, fixed, current, and recurring up to Rs 1 lakh a depositor/bank. The premium paid by the insured banks to DICGC is required to be absorbed by the banks themselves; for depositors, the benefit of this service is free of cost. The Commissionerate, according to a tax consultant, appears to have invoked Section 65(105)(zzb) of the Finance Act, 1994, which was amended with effect from May 1, 2006. According to this section, the concept of ‘commercial concern’ was replaced by ‘person’ with a view to expand the scope of service providers. This means that even a not-for-profit organisation (like DICGC, which is not a commercial concern) providing service to its stakeholders will have to pay service tax by collecting the same from the latter. – www.thehindubusinessline.com
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