Bank service tax to cause pain

Next time you go to a bank counter to buy a demand draft or open a locker to keep your valuables, you will have to cough up a higher charge, thanks the Budget proposal of 10 per cent service charge on any banking service.

What more, even loans will be costlier as the tax will be levied on all loans also.

The Budget has proposed to impose 10 per cent service tax on lending; issue of pay order; demand draft; cheque; letter of credit and bill of exchange; providing bank guarantee; over draft facility; bill discounting facility; safe deposit locker, safe vaults; operation of bank accounts.

"We were under the impression that the service tax will be imposed on only auxiliary services like mutual fund units or insurance policies that we sell. But it seems that all banking services will attract service charge. We will take up the issue with the finance ministry," said a senior banker. If the finance ministry does not reconsider this, commercial banks will pass on the burden to the consumers.

"Globally, the banking industry has been focussing on fee-based activities. In other words, service is emerging as an important revenue stream. No bank can afford to absorb this," said another banker.

The Indian Banks' Association (IBA) has already one round of meeting with the finance secretary. It will meet the ministry again before the Finance Bill is passed.

"Banks will simply pass on the increased tax load to customers," said a senior official with a private sector bank. For example, if a bank earns Rs 1,000 per annum by way of interest on a Rs 10,000 loan, it will henceforth charge Rs 1,100 per annum due to the effect of 10 per cent service tax.

The services coming under the 'banking and other financial services' ambit to be 'taxed' are : financial leasing services including equipment leasing an hire purchase; credit card services' merchant banking services; securities and foreign exchange broking; asset management, including portfolio management; all forms of fund management, pension fund management, custodial, depository and trust services, but does not include cash management; advisory and other auxiliary financial services.