Banks - Refund penal charges on minimum balance. Stop fleecing.

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I have been on the receiving end a few times (I am sure many of you might have been) when we were levied a penal charge by the bank for not having maintained the stipulated minimum balance in the account. Now, I read an article, which was an eye opener to say the least, that the banks are asked to pay service tax for accounts where minimum balance is maintained.

As a stock broker and financial analyst, it did not take too much of time to understand the tax department’s claim and the banks’ response to the claim too, did not surprise me.

The tax departments’ claim:

The banks offer an array of services depending on the type of account held by you and me (account holder). The rendering of these services have a cost to the bank and the bank charges its account holder a penal charge for not maintaining the stipulated minimum balance, in lieu of the services provided by the banks to the account holder. Service tax is being demanded by the tax department from the banks, for the accounts where minimum balance is maintained, for an amount which is equivalent to the penal charges levied by the banks, which in departments’ view, is the cost of the services provided by the banks.

The banks seem to suggest that they are charging customers by levying a penalty, for the services provided by them to the account holder, only when they are not maintaining the stipulated balance in the account. They claim that the services provided by them are free, as long as the customer maintains the minimum balance which was mutually agreed upon. The banks insist that the services are free, as they do not receive any consideration, for the services provided by them to its account holders, where the minimum balance is maintained.

This is where the opinion of the tax department is different.

The department claims that the banks are remarkably consistent and predictable in levying penal charges for services rendered by them to its account holders when the account holders do not maintain the minimum balance. The department states that when the customer does maintain the minimum balance, the banks get remuneration for the services by extracting monetary value out of the minimum balance. Further, the department is of the view that the value of the services provided by the banks to its account holders’ is equivalent to the

a)      the penal charges which is levied while minimum balance is not maintained

which has to be equal to

b)      the earnings out of the maintained minimum balance

Valuation rules of service tax support the claim of the tax department that the value of the services is equivalent to the penal charges levied when the balance is not maintained or the amount that the bank monetizes out of the minimum balance maintained in the account. The department also opines that the banks themselves have revealed the value that they extract out of the minimum balance by charging an equal amount in the name of penal charges when the account holder does not maintain minimum balance.

The banks claim:

The tax department can charge service tax when the bank receives a consideration for services rendered. The banks claim that they receive a consideration for services rendered by them only when penal charges are levied for non- maintenance of minimum balance and claim to offer free services when the account holders maintain the stipulated minimum balance.

It is unbelievable that my bank provides me an array of services free of cost for a few months and charges for the same set of services on some other months. It is very clear that the banks do not want to be taxed for the services rendered by them during the months when the account holders do maintain the minimum balance.

My expectations:

Though my view might not be of any significance to both the parties, I have a few questions to the banks:

1)    Dear Bank, when you are kind enough to offer me free services (on the months when minimum balance is maintained) why do you charge me penalty for the same set of services that you intend to deliver free, when I do not maintain the minimum balance?

2)    Dear Bank, if you succeed in convincing the department that enforcing a minimum balance on me does not amount to receiving a consideration for the services rendered by you, then you do not have the right to receive the consideration from me by way of penal charges for non-maintenance of minimum balance.

3)    Dear Bank, since you seem to suggest that the services are free of cost, you are requested to refund all the penal charges levied on me over the years along with interest.

I sincerely wish that you convince the department that you are offering services without receiving any consideration towards it and hence I hope and pray that all the penal charges levied on me would be credited to my bank account along with commensurate interest.



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