SBI plans to partially bear service tax in CMS gambit

In the intensely competitive cash management services market, State Bank of India (SBI) is planning to unleash a price war by partly bearing the newly imposed 10.2 per cent service tax levy.

Said sources, "SBI is considering making the service tax negotiable in order to compete with the private and foreign banks who are very aggressive in this market. The 10.2 per cent levy will be made negotiable with the customers and part of it may be borne by the bank."

SBI faces severe competition in this market from foreign players such as Citibank, Standard Chartered Bank and private banks such as ICICI Bank and HDFC Bank. It is however not clear how much burden SBI is ready to bear.

A 10.2 per cent service tax levy was announced in the Union Budget for all banking services such as issuing drafts, letters of credit, guarantees, transfer and remittance of funds, cash management services and so on.

For most retail transactions, banks have passed on the service tax entirely to the customer while in more competitive segments such as cash management, it is a mixed picture.

While the public sector banks such as Punjab National Bank and Union Bank of India pass on the entire levy to the customers, the more aggressive private banks at times look at it on a case by case basis.

"More often than not we pass on the entire tax to the customer but there are times when we bear the levy depending on the size of the business proposition," said the corporate banking head of a private sector bank.

SBI provides cash management services to corporate clients with turnover of over Rs 25 crore under the brand name 'SBI-FAST' (Funds Available in Shortest Time) from 320 collecting locations across the country.

The product is aimed at enhancing liquidity, reducing costs and providing opportunities for profit to corporate clients. The product is technology-driven and the entire network is linked through Vsat/ leased lines.