Service Tax / GST on Non-Maintenance of Minimum Balance: Karnataka High Court’s Ruling in Canara Bank Vs Union of India

1. Background and Context

In a batch of writ petitions, a group of Public Sector Banks, including Canara Bank, approached the Karnataka High Court challenging show cause notices issued by the Service Tax / GST authorities. These notices proposed to levy service tax (for periods up to 30.06.2017) and GST (for the post-01.07.2017 period) on amounts collected from customers who failed to maintain the stipulated Minimum Average Balance (MAB) in their bank accounts.

The central allegation in the show cause notices was that:

  • Customers’ commitment to maintain MAB constituted non-monetary consideration for various banking services and facilities, and
  • The penal charges collected when customers did not maintain MAB represented the monetary equivalent of such non-monetary consideration, and therefore, should be subject to service tax / GST under the Finance Act, 1994 / Finance Act, 2012 and the CGST Act.

The assessee-banks disputed this approach and asserted that no taxable “consideration” arose merely because customers undertook to keep a minimum balance or paid charges upon default.

2. Business Model and Nature of Banking Services

The petitioning banks are large Public Sector Banks offering:

  • Savings bank accounts
  • Current accounts
  • Multiple ancillary facilities (ATM usage, chequebooks, online banking, debit cards, etc.)

Customers are free to choose from different account types, each with its own set of:

  • Features and facilities (bundled services)
  • Conditions (including MAB requirements)
  • Charges and penalties in case of non-compliance with agreed conditions

The banks argued that MAB is only one of the contractual conditions that customers agree to while opening and operating accounts. It is not a separate “price” for any independent service.

3. Revenue’s Stand in the Show Cause Notices

The Department’s notices relied heavily on:

  • Section 66B, Section 65B(44) and (51), Section 66E(e) and Section 67 of the Finance Act, 2012, and
  • The definition of “consideration” in Section 2(d) of the Indian Contract Act, 1872.

The key assertions in the notices were:

  1. Non-monetary consideration

    • By agreeing to maintain MAB, customers allegedly provided a non-monetary benefit to the banks.
    • This commitment was treated as “consideration” for services (like concessional facilities, free services up to certain limits, etc.).

  2. Valuation under Section 67

    • When customers failed to maintain MAB and the bank levied penal charges, the Department sought to treat these penal charges as a notional or deemed value of the non-monetary consideration (i.e., the commitment to maintain MAB), thereby bringing them to tax.

  3. Declared service under Section 66E(e)

    • The Department invoked Section 66E(e) (“agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”) and contended that:
      • The banks had “agreed to an obligation to do an act” — namely, rendering bundled banking services,
      • The customers’ act of keeping the MAB (or failing to do so) constituted the “consideration” for that obligation,
      • Consequently, the banks were liable to pay service tax on the value so determined.

On this basis, the impugned show cause notices demanded service tax along with interest and penalty from the banks.

4. Assessee-Banks’ Core Arguments

The banks, represented by senior counsel, challenged the notices on both jurisdictional and substantive grounds. Their main submissions were:

4.1 No “Consideration” for Maintaining MAB

  • The banks did not charge any amount for the act of maintaining MAB.
  • MAB is simply a condition for operating a particular type of account, not a quid pro quo for separate services.
  • When customers maintain MAB, they continue to receive the agreed bundle of services without any additional charge.
  • When customers fail to maintain MAB, the bank may collect a penalty or charge, but:
    • Such charges are in the nature of penal / compensatory amounts for breach of a contractual condition,
    • They are not “price” or “consideration” for a distinct service supply.

4.2 No Independent Supply Under Section 66E(e)