Banks get big relief as Karnataka High Court rules minimum average account balance not subject to service tax

Observance of the established MAB is “only one of the contractual provisions governing the relationship between banks and their clients” and in case of their violation or delay, the only consequence is the imposition of a fine, says the court. | Photo credit: File photo

In a relief to the banking sector, the Karnataka High Court ruled that banks are not liable to pay service tax merely because customers have a minimum average balance (MAB) in their accounts.

The court said that maintaining a MAB is only a condition of maintaining a bank account and does not constitute a payment or ‘kickback’ for any service tax as maintaining a MAB is essentially nothing but maintaining a deposit in a bank account.

Bank petition

Justice SR Krishna Kumar passed the order while allowing the petitions filed by Canara Bank, Bank of Baroda and Bank of Karnataka Bank and subsequently quashed the show case notices issued to them by the Additional Director General of GST (Central Tax-Intelligence) for 2020-2021. The GST authorities have issued similar notices to several other banks and financial institutions.

The dispute covered the pre-GST period up to June 30, 2017, as the tax authorities alleged that customers maintaining MABs were effectively providing banks with a form of non-cash consideration. According to the announcement, banks offered a basket of services in exchange for customers agreeing to maintain a prescribed balance, and the value of this “kickback” could be quantified in terms of penalties imposed if customers did not maintain a minimum balance.

“The act of customers maintaining MABs cannot be construed, considered or described as ‘payment’ for services rendered by banks,” the court said, noting that “MAB is only a contractual term and not payment for services rendered.”

The court also said that the notices issued to the banks are ex facie in violation of the various circulars as well as the scheme and mandate of the provisions of the Finance Act.

Contractual arrangement

Maintaining a set MAB is “only one of the contractual arrangements governing the relationship between banks and their customers” and in the event of their breach or non-compliance, the only consequence is the imposition of a penalty, the court said, noting that such penalty fees cannot be unimaginatively construed, characterized, categorized or treated as a “pecuniary” benefit or not entailing a “pecuniary” benefit. only for the purpose of maintaining such MAB.

According to the court, it is significant that the customer retains the right to withdraw the entire amount to the credit of the account, which inexorably leads to the conclusion that MAB cannot be considered “consideration” for the services provided by the banks.

Published – 22 Jun 2026 21:20 IST