Want a DD? Keep the change

Education cess, service tax spawn a paise nightmare for banks

The next time you walk into a bank branch to buy a demand draft for Rs 100, please carry a change of 51 paise. Why? Well, you would need to pay Rs 5 to the bank as a charge for the draft and 51 paise to the government towards service tax (at the rate of 10 per cent on the DD charge) and education cess (2 per cent of the service tax).

The catch is that the bank is not willing to take one paise less or nine paise more to round off the sum for mutual convenience as a Supreme Court judgment does not allow the financial intermediary to do so.

In fact, the bank used to follow the formula of rounding off the sum till about a few years back while computing interest taxes but it was stopped as Supreme Court found this as an unfair trade practice. "We hardly get to see coins in less than Re 1 denomination. How do we settle the transactions in paise?" asked one bank chairman.

Till recently, banks were collecting service tax on credit card services, leasing and hire purchases, merchant banking, securities and forex broking, asset management, advisory services and transfer of information and data processing at the rate of 8 per cent.

The Union Budget 2004-05 has raised the level to 10 per cent and included pay order, demand draft, cheque books, issue of letter of credit, safe deposit lockers and almost every banking service like account closing to loan processing and even ATM transactions under the service tax net. The only thing that is left out is interest on loans. Factoring in 2 per cent education cess, the effective rate works out to 10.2 per cent.

Going by the finance ministry proposal, service tax collated during a month should be remitted within 15th of the next month. The banks can adjust the service tax paid on various services like advertising, insurance, telephone, etc. against the service tax collective from the customers.

In other words, the government will only get the netted amount. However, to take advantage of this norm, banks need to maintain all records. In case they do not want to keep the records, banks can net off only 35 per cent of the service tax collected by it from the customers.

Banks are in a soup on three counts. First, no one has the faintest idea of how to get hold of the smaller changes that will be required to conduct the transactions. Second and more important is the paperwork involved and the manpower required.

Since services are provided by branches, employees of over 65,000 branches across the country need to run to the local excise commiserates to deposit the taxes every month.

Finally, there will be complications in collection of the tax for certain businesses. For instance, banks normally take the charges for lockers in advance for six months or even a year. However, the bank branches need to collect the service tax from their customers on a monthly basis and deposit to the government.