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Banks can’t claim tax relief on FD insurance

Reversal of credit would lead to an increase in cost by anywhere between Rs 200 to Rs 500 crore for banks.

, ET Bureau|
Updated: Dec 06, 2019, 08.54 AM IST
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MUMBAI: The indirect tax department has asked banks to reverse input tax credit claimed on insurance paid to Deposit Insurance and Credit Guarantee Corporation (DICGC), a step that will escalate costs for the lenders.

Banks insure Rs. 1 lakh of customer fixed deposits with DICGC. This means that if the bank goes bust or faces any other problem, the customers could recover Rs. 1 lakh from their total fixed deposits. On the insurance premium paid by the banks to DICGC a service tax was levied, which was then considered cost and was added to input tax credit.

The indirect tax department contends that the service tax paid on the insurance amount is not towards the banks' core function, and hence credit cannot be availed. For top banks, reversal of credit would lead to an increase in cost by anywhere between Rs. 200 to Rs. 500 crore.

Most banks have either approached or are looking to approach tax tribunals to challenge the taxman's position, said several persons in the know. “The controversy has picked up substantially due to the difference of opinion of various tribunals. The Bombay High Court referred the matter to a larger bench of the tribunal,” said Abhishek A Rastogi, partner at Khaitan and Co.

Input tax credit is a mechanism whereby companies and banks are allowed to set off taxes paid on raw materials or certain services against future tax liabilities. For most banks the reversal of tax credit would also mean this could go back to at least seven years. Most banks have taken a position that the insurance premium paid is an input cost and hence should be added to input tax credit.

The controversy pertains to the erstwhile tax regime but industry trackers said banks could face similar demands under the Goods and Services Tax (GST) regime as well. While the tax department has not issued any notices under the GST regime, most banks seem to have stuck to their position around input tax credit. This could lead to litigation if banks are issued notices in the coming months, tax experts said.

Banks have had their own share of tiffs with the indirect tax department. The indirect tax department is scrutinising and want to tax banks for allowing their subsidiaries to use logos for free. The tax department has issued notices to banks that allow subsidiaries, such as mutual fund and insurance units, to use their logos for free. The tax department wants the banks to pay 18% GST on the “deemed” value of such transactions and has even calculated how much these are worth.

Subsidiaries use logos for the promotion of related products with the understanding that no fees have to be paid.
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