HC Quashes Service Tax Notices on Minimum Balance Banking Services, Rules MAB is Not Consideration

The Karnataka High Court has quashed a batch of service tax show cause notices issued to several leading banks, including Canara Bank, Bank of Baroda and The Karnataka Bank Ltd., holding that maintenance of a Minimum Average Balance (MAB) by customers cannot be treated as consideration for banking services under the Finance Act, 1994.

The dispute related to the pre-GST period up to 30 June 2017. The tax department alleged that banks were providing a basket of free services to customers who maintained the stipulated MAB in their accounts and that the customers’ commitment to maintain such balances amounted to a form of non-monetary consideration. Proceeding on this basis, the department sought to levy service tax by assigning a notional value to the services, using the penalty charges collected from customers who failed to maintain the required balance as a benchmark.

The banks challenged the notices, contending that maintenance of MAB was merely a contractual condition attached to the banking relationship and not a separate consideration for any service. They argued that whenever customers failed to maintain the prescribed balance, banks recovered penalty charges and duly discharged service tax on those charges. Consequently, the department’s attempt to tax an imputed value of services rendered to compliant customers lacked legal basis.

Allowing the writ petitions, Justice S.R. Krishna Kumar observed that under the negative list regime, service tax could be levied only where an activity is carried out for consideration. Examining the contractual arrangements between banks and customers, the Court held that maintenance of a minimum balance is only a condition of the contract and cannot be elevated to the status of consideration, whether monetary or non-monetary.

The Court further noted that the contractual consequence of failing to maintain the MAB was the levy of a penalty or fee, on which service tax had already been paid by the banks. Imposing tax once again on a hypothetical value attributed to services provided to customers maintaining the required balance would effectively amount to double taxation, which is impermissible.

Relying on departmental circulars, including Circular No. 178/10/2022-GST and Circular No. 214/1/2023-Service Tax, the Court emphasized that a taxable service requires a clear contractual nexus between the activity and the consideration. Since the maintenance of MAB was not the consideration for the services rendered by the banks, the department lacked jurisdiction to raise the impugned demands.

Thus, the High Court quashed the show cause notices and granted relief to the petitioner banks.

To Read Full Judgment, Download PDF Given Below