Service tax on 'fine'.

Sunil (Querist) 10 August 2011 This query is : Resolved
Indian banks are deducting certain amount if the account holder is not maintaining the required quarterly average balance in his savings account. This is 'penalty' to individual. How can banks charge 'SERVICE TAX' on this 'PENALTY' ?

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R.Ramachandran (Expert) 10 August 2011
Dear Sunil,

In the first blush your argument would appear very convincing.
But a calmer analysis would reveal that what is "fine" is not a "penalty". Both are completely different like chalk and cheese.
Having said that, the question still remains whether even on "fine" whether the bank can charge Service tax. In other words, whether bank is rendering any service by imposing fine on the customer?
Think this way, by allowing to open an account and operate with the bank it is rendering service. One of the conditions for continuing the service is your maintaining minimum average balance. If you breach that condition, the bank would be within its rights to close the accounts and refuse to render you the service. But that service can be continued by bank if you pay a fine for your default. So, the money in the form of 'fine' which the bank gets is for rendering the service; the service of continuing to maintain the account. Thus, the bank is duty bound to include as its service revenue and accordingly to charge service tax on that.
It is altogether another matter as to how you view it. For you "fine" paid by you acts as a burden, but nevertheless from the bank's perspective and from the Service Tax Department perspective, it is a consideration received by the bank for its services and is therefore liable to service tax, which burden is again passed on by the bank to the customer.

Guest (Expert) 10 August 2011
In short, you may like to understand, there is no distinction between service on regular tansactions and service on transaction on account of penalty charge for maintaining customers account to keep that alive for transactions.

Any amount on account of the service tax is not kept by the bank, itself, but is paid to the Government. If it does not charge from the customers the bank becomes liable to pay from its own funds, which no commercial organization would prefer as against the interest of its stakeholders/shareholders.