A few weeks ago, the taxman shocked banks when tax demands were served on the “free services” they offered their customers. The taxman argued that since banks levied a fine on those customers who didn’t maintain a minimum balance, but didn’t levy this on those that did maintain the correct balance, this was, in effect, the value of the service it gave customers.
The argument made little sense since a penalty can’t possibly be equated with the cost of a service—the penalty is high precisely because it is meant to be a deterrent—but the taxman used it to levy demands that could have run into several thousand crore rupees. Since the taxman could theoretically impute the value of any “free service” and then levy a tax on it, instead of actually looking at what customers paid for their services, the move set off alarm bells in other sectors as well.
Possibly horrified by this as well as other creative interpretations by various taxmen, the Central Board of Indirect Taxes and Customs (CBIC) has issued a 91-point Frequently Asked Questions (FAQ) for both the taxman as well as taxpayers, and one of the questions deals with the issue of “free services”. The answer to this is quite categorical, “such services provided to persons who are not related persons will be taxable on the transaction value, that is, the value of the services charged or recovered from the customers or account holders as per section 15 of the CGST Act, 2017”.
In this case, since there is no value being charged, the GST is also nil. While the FAQs are a big relief, the CBIC must ensure these instructions are given to the tax tribunals to ensure that existing cases are dismissed immediately. More important, however, is the issue of how such a creative interpretation of the law took place in the first instance and how the CBIC was so slow to react. Indeed, as this newspaper has argued before, given that this is not the first time the taxman has been so creative, both the tax boards—Central Board of Direct Taxes and CBIC—have to be more alert and, apart from issuing detailed FAQs from time to time, they have to be examining the impact of all tax rulings/demands.
Some years ago, when the Budget speech said no MAT would be applicable to FII transactions in the future, the taxman interpreted that MAT was therefore applicable in the past and a series of tax notices were sent out. The government then asked Justice AP Shah to examine the issue and when the committee said that a tax could not be levied, the taxman dropped these demands.
Indeed, the Rs 7,38,873 crore of tax arrears—up from Rs 2,56,167 five years ago—is testimony to the fact that the taxman’s demands can often be arbitrary; it is the job of the two tax boards to come up with solutions to these mounting disputes.