Karnataka High Court quashes service tax on bank minimum‑balance accounts

The Karnataka High Court set aside a batch of service‑tax show‑cause notices issued to several public‑sector banks, including Canara Bank, Bank of Baroda and The Karnataka Bank Ltd. The court held that a customer’s obligation to maintain a Minimum Average Balance (MAB) is merely a contractual condition, not consideration for banking services, and therefore cannot attract service tax under the Finance Act, 1994.

The court noted that levying tax on an imputed value of services provided to customers who keep the required balance would amount to double taxation. It also referenced an earlier adjudication in the South Indian Bank case, where similar notices were withdrawn, reinforcing that no taxable supply arises from the MAB requirement. Consequently, the service‑tax notices and associated penalties were cancelled, granting relief to the banks.

The decision clarifies the application of section 7 of the CGST Act and related provisions, confirming that only a clear nexus between a supply and consideration can trigger tax liability.