Higher service tax to make banking services costly

Banking services such as ATM transactions, debit cards, credit cards, processing of demand drafts and even deploying security guards at ATMs and bank branches will cost more after the service tax was hiked from 12.36% to 14% in the Union Budget presented by finance minister Arun Jaitley on Saturday.

And if the proposed tax to keep India clean -- the Swachh Bharat cess – is included, then the effective service tax for the common man would be more pinching at 16%.

Though the government has not yet made it clear what services would attract the clean India tax but a tax expert at a leading consultancy firm said that Swachh Bharat cess is likely to be rolled out across all services given that it is the flagship programme of prime minister Narendra Modi.

Arundhati Bhattacharya, chairman, State Bank of India, told dna, "The cost of banking services like ATM debit and credit card transactions is going up but it is difficult to quantify how much will be passed on to the customer. Even the cost of maintaining security will go up with the service tax being hiked. We need to study the impact of the additional cost, before we can quantify how much will be passed on to the customer."

ATM security was a big issue after an attack on a woman in a Bangalore ATM was caught on the CCTV. Banks were beefing up security. But with the added cost of employing security guards, banks may think twice before strengthening the security.

Arun Tiwary, chairman and managing director, Union Bank of India, said, "Though RBI had capped the number of free ATM transactions at five, we were giving eight transactions free for our customers. We may bring this down to five if the costs are really pinching us. But I am not sure how much of the added cost is there on our books. Our technical committee is studying the impact."

Jaitley in his budget speech had asked everyone to own a Rupay card, the indigenously developed debit card. He promised that each card holder would benefit from it. But what the government intends to give with one hand is being taken away from the other hand, by making all electronic transactions more expensive.

The central bank and the government are also aiming for a cashless society by incentivise everyone to migrate to electronic payments. But the additional cost levied on cards will act as a disincentive. Even for companies, the issue of letter of credit, overdraft facilities, etc would attract additional taxes.

The government says the hike in service tax is to prepare people to migrate to goods and services tax (GST) when the services tax could go up to 18%. Economic Survey by the government released a day ahead of the budget said Constitutional amendment bill to implement GST also needs to be enshrined in legislation first by Parliament followed by ratification by the states. "A single GST rate (across states and products) set at internationally competitive levels with limited exemptions would maximize its pro-growth, pro-compliance, and pro-single market creating potential," the Survey had said.