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If Tax Collections Have Improved, why is Govt Trying to Tax Free Services of Banks?

Apr 30, 2018


Analysis is the ability to look at different data points and try and make an overall sense of the way things are.

This is something that rarely happens in the media, given that the media is more interested in reporting the news on one day, and then moving on to whatever is happening on the next day.

There is very little time to take a backseat and see the bigger picture, which is why, the media tends to typically miss the wood for the trees. The media may write/broadcast the first draft of history, but it rarely writes/broadcasts the first analysis.

In today's piece we look at such a situation.

In early April 2018, the Modi government reported a significant jump in direct tax collections and as usual made a lot of song and dance about it. The song and dance did not come as a surprise to us, given that this government specializes in managing the optics on different issues. (Like the recent song and dance about electricity reaching all Indian villages. Most Indian villages already had electricity when Narendra Modi came to power. What his government did was basically put the cherry on the cake (and not even the icing). Also, just because a village has electricity, doesn't mean all households in the village have an electricity connection. Wonder, why this data point wasn't shared by any of the ministers?

While, this is a great thing to have happened, the Modi government had a very small role to play in it.)

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Getting back to the issue at hand. As finance minister Arun Jaitley said about the direct tax collections going up: "The data reveals the efficiency of tax department and rise in no. of honest tax payers. This historical revenue receipt is a factual testimony of accountable governance under PM @narendramodi ji."

We were skeptical about the jump and a recent action of the government has more than proved that. A little over a week back, it was reported that the government (Directorate General of Goods and Services Tax Intelligence (DGGST) to be specific) has sent notices to banks asking them to pay taxes and penalties on the free services they have offered to their customers over the years.

Newsreports suggest that the total amount of taxes to be paid along with penalties should amount to Rs 40,000 crore. The taxes are to be paid with effect from 2012, and include 12% service tax, 18% interest on that amount and a 100% penalty on it.

This is clearly an act of a government which is desperate to raise revenues. There are multiple points that crop up here:

1) If the direct tax collections have been as fantastic as claimed by the government, why is the government trying to tax and penalise free services offered by banks. The answer as we had suggested in an earlier piece, lies in the fact that the direct tax collections have been bumped up by going slow on refunds ( at least the data suggests that).

Further, a newsreport in The Economic Times said that hundreds of companies had received letters from the income tax department which requested these companies to deposit the tax deducted at source (TDS) with the government before the financial year ended. Typically, companies deposited the TDS by the seventh of next month. In this case that would have meant April 7, 2018, and the tax collected as TDS would have reflected in the government accounts of 2018-2019 and not 2017-2018.

By getting companies to deposit TDS in advance, the direct tax collections for 2017-2018, were bumped up. The trouble is that collections in April will now fall and that has to be made up for from somewhere.

2) As of December 2017, the banks were facing bad loans of close to Rs 9,00,000 crore. Public sector banks have accumulated more than 86% of these bad loans. To send banks notices demanding Rs 40,000 crore in such a situation is totally uncalled for. The fact that the government is ready to unleash retrospective taxation, even after saying that it won't, shows the desperation of the government on the revenue front.

On one front, the government is recapitalising public sector banks, and on the other front, it wants banks to pay taxes with retrospective effect. This just doesn't make any economic sense.

3) The central GST collections for 2017-2018 have not been up to the mark. The government expected to collect Rs 2.21 lakh crore. It has managed to collect just Rs 1.19 lakh crore, a difference of more than Rs 1 lakh crore and this money has to come from somewhere.

4) As we keep saying, there is no free lunch in economics. If banks are forced to pay this money out to the government, they will pass it on to their customers. Basically, the free services that banks currently offer will become chargeable. Further, charges on other services which are not free, might go up. If this goes through we need to get ready to pay money for something as simple as ATM withdrawals.

5) Also, in order to calculate a tax on anything, a value has to be ascribed to it. How have values been ascribed to free services going back as far as 2012? Beats us.

Long story short, the optics management of the Modi government is finally catching up with it. All is not well on the revenue front.

Vivek Kaul
Vivek Kaul
Managing Editor, Vivek Kaul's Diary

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Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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6 Responses to "If Tax Collections Have Improved, why is Govt Trying to Tax Free Services of Banks?"

Girish Patkar

May 2, 2018

Are we satisfied with what we get .....monetary or otherwise... No! We always want better facilities, better roads, better defence preparedness, better power supply, better hygeine, better subsidies, better retirement benefits etc.etc. If we expect the Government to improve on facilities year on year, the Government expects more taxes yoy !



May 2, 2018

Agree with your views Mr. Kaul. Always governments have been taxing the ordinary citizens for its revenue mismanagements and mischieves. Not only the current govt. but previous governments have been following the same path. TAX them from somewhere or the other. That is the mantra. Double taxation on Dividends and now Tax on Long-Term Capital Gains are the perfect examples. We, Indians as a society have been always been happy to be ruled by someone or the other and pay exobitant taxes to satisfy rulers greed. We dont ask questions or assert the right to seek where actually the revenues are being actually being spend. My basic question is by when INDIA will come out from the Fiscal Deficits it incures every year or its fate would be sealed one day like NCLT cases.

Like (1)


Apr 30, 2018

Dear Vivek ji
I am indeed fan of your writings. I am however surprised at political comments becoming regular feature of your otherwise informative writings.
Anyways, with respect to this specific article, in my opinion you have missed to address one important point. Which is " in first place are banks liable to pay the mentioned taxes? Or in other words did bank slept over it or even evaded tax payment?" If this indeed is a case than Government should be applauded for recovering legitimate dues which at end of the day becomes available to use for national building.
Also you referred to bank recapitalisation. Do you mean that tax recoveries are only from public sector banks.
As I am out of country for more than a week I am not fully updated on the issue. Therefore if I have misunderstood something I do apologize for the same.
Looking forward to your valuable feedback.
Vikram Bhatt


Like (1)


Apr 30, 2018


The TDS for March of any year is required to be deposited by 30th April and not by 7th April.

Further, it must be remembered that the services by Banks are not free but linked to certain minimum balances which earn only a measly 3.5% and hence the differential is the cost to the customer. Therefore, it is a misnomer on the part of the Bank as well as the Department to call the services free.

Like (1)


Apr 30, 2018

Writer appears to be a paid Congress stooge. Like RaGa, posing as a know-all, he seems to be bent on criticizing the present Government at the Centre. For a change, why not change the mindset and write about the good improvements the Government has brought about and highlight the inextricable mess made by the Congress party in the six decades of their rule. And surely, he understands that you cannot change the country overnight for the better after six decades of rampant corruption and misrule by the Congress.

Like (1)

Ashok Inani

Apr 30, 2018

Dear Mr Vivek Kaul - I consider you to be an astute Finance man and still you forwarded arguments in your article which makes No-sense. In all the points you have echoed the same objection which is "why banks should be asked to pay Service tax (GST) for free services"... I fail to understand how at the first place are you connecting this with Direct Income tax and increase in number of tax payers. Moreover if something has escaped tax - shouldn't the Govt try to recover it. Do you wish to advocate that forgiving the tax instead of capitalization is better economics then I am sorry - Mr Kaul we differ big time? What theory is this? Why is it difficult for you to swallow the fact the data collected in Demonitzation was a massive reason for such increase in direct taxes and number of payees? The Govt of the day is still filtering the data which might help increase this number more going forward.
It smacks of some problem at your end and gives a feeling that even you have been caught on the wrong foot..

Like (7)
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