The Hidden Cost of Falling Short
Imagine this: You’re juggling bills, groceries and school fees and one month you dip below your bank’s minimum balance requirement. Next thing you know, your bank slaps you with a penalty. Annoying, right? But wait—there’s more! On top of this penalty, you’re charged 18% goods and services tax (GST). Suddenly, your small slip-up feels like a costly crime.
Banking on Penalties: A Closer Look
We all know banks offer services—money transfers—NEFT (national electronic funds transfer), RTGS (real-time gross settlement) , demand draft, IMPS (immediate payment service), etc safe deposit lockers, cheque books and more—and GST applies to most of these. But did you know some banking transactions are exempt from GST? According to government notifications, when banks take deposits or give loans (except via credit cards), GST doesn’t apply. Why? Because the 'service' here is really just interest- banks pay you for deposits, you pay them for loans. No goods, no taxable service.
So why, then, are banks charging GST on penalties for not maintaining your balance? Is this just a technicality—or a lucrative loophole?
Notification of Exempted Services
Notification no. 12/2017 CTR (Link
Notification12-CGST.pdf) provides a list of services which are exempted from GST.
Penalty ≠ Service: The Legal Loophole
Let’s get this straight: When you open a savings or current account, you agree to certain terms, including keeping a minimum balance. If you slip up, you pay a penalty. But here’s the kicker—this penalty isn’t a 'service' you’re buying. It’s a deterrent, a contractual slap on the wrist.
The law seems clear: Entry 27(a) of notification 12/2017 says deposits (including savings accounts) are GST-exempt. No goods, no service, no GST. Yet, banks have been tacking on GST to these penalties, turning a simple penalty into a double whammy.
Classic Example and Clarification by CBIC (Central Board of Indirect Taxes and Customs)
Circular no. 178/10/2022-GST dated 3 August 2022 explicitly states that penalties imposed for violation of laws—such as traffic violations or pollution laws—are not subject to GST. The rationale is that these penalties are not consideration for any supply of goods or services. There is no agreement between the government and the violator to tolerate the violation in return for payment of penalty; rather, penalties are imposed to penalise and deter such violations.
The circular further explains that fines and penalties paid for violation of provisions of law do not constitute consideration, as no service is received in lieu of payment of such fines and penalties. This position was also supported in earlier service tax regimes and continues under GST.
Twist in the Tale: The Loan Penalty Precedent
As the CBIC put it:
“The essence of a contract is its ‘performance’ and not its ‘breach’... Penal charges are for preventing breach of contract or non-performance and are thus mere ‘events’ in a contract.”
2.4 Penal charges levied by REs (regulated entities), in compliance with RBI (Reserve Bank of India) directions dated 18.08.2023 are essentially in the nature of charges for breach of terms of contract and hence, fall within the ambit of the above clarification”.
“2.5 Thus, as recommended by the 55th GST Council, it is hereby clarified that no GST is payable on the penal charges levied by Regulated Entities, in compliance with RBI directions dated 18.08.2023, for non-compliance with material terms and conditions of loan contract by the borrower”
If that is true for loans, shouldn’t it be true for savings and current account penalties, too? After all, a penalty is a penalty, whether you missed a loan installment or fell short on your balance.
Real-world Impact: Kicking Customers When They’re Down
Let’s face it—if you’re unable to maintain a minimum balance, you’re probably already feeling the pinch. Adding 18% GST to your penalty is like rubbing salt in the wound. Over five years, PSBs alone have collected Rs1,295 crore in GST from these penalties from SB account holders. Imagine the total if we count private banks and the penalties paid by the current account holders!
And here’s the irony: The people hit hardest by these charges are often those least able to afford them.
What Needs to Change: A Call to Action
It’s time for a reality check. RBI, the Indian Banks’ Association (IBA), All India Bank Depositors’ Association (AIBDA) and consumer advocates must push the government to exempt these penalties from GST—just as they did for loan penalties. This is not about blaming banks or regulators; it is about fairness. If a penalty for breaking a contract on a loan isn’t a service, neither is a penalty for not keeping a minimum balance.
The Bottom Line: Fair Play for All
The rules should be the same across the board. Customers should not be punished twice for a simple mistake—once by the bank, and again by the taxman. It is time to close the GST penalty trap and bring some much-needed relief to millions of account-holders.
After all, what is good for the goose should be good for the gander. Don’t you think?
If you have ever been stung by a penalty plus GST, share your story! Let’s make some noise for fair banking.
(Chandramouli Mohan retired as a senior manager from a public sector bank after 38 years of service in various capacities in several places across the country. He has been an RTI and consumer activist since his retirement in March 2020.)
