The Karnataka High Court held that Minimum Average Balance (MAB) in bank accounts is not consideration for banking services and cannot be subjected to service tax under the Finance Act, 1994.

June 20, 2026 : In a significant ruling, the Karnataka High Court has held that the maintenance of Minimum Average Balance (MAB) by bank customers is merely a contractual condition governing the banker-customer relationship and cannot be treated as consideration for banking services under the Finance Act, 1994. Consequently, no service tax can be levied on the value of such balances.

A single-judge Bench of Justice S.R. Krishna Kumar observed that the concepts of “service,” “taxable service,” “declared service,” and “valuation” under the Finance Act necessarily require the existence of consideration. In the absence of consideration, no taxable service can arise. The Court found that the tax authorities had erroneously equated the contractual requirement of maintaining MAB with consideration for services provided by banks.

The Court further clarified that Section 66E(e) of the Finance Act, which deals with declared services involving an agreement to refrain from an act, tolerate an act, or do an act, applies only when there is an independent contractual arrangement supported by consideration flowing from the other party. Since no such arrangement existed in the present case, the show cause notices were based on a fundamentally flawed premise and could not be sustained in law.

According to the Court, maintaining a minimum average balance is simply one of the conditions attached to the operation of a bank account. If a customer fails to maintain the prescribed balance, the bank may levy a penalty. Service tax on such penalties had already been paid by the banks. The Court noted that banking services continue to be provided even when customers fail to maintain the stipulated balance, demonstrating that MAB is not a form of payment for those services.

Rejecting the department’s argument that MAB constituted non-monetary consideration, the Bench held that customers remain free to withdraw their deposits at any time, banks do not appropriate those funds as consideration, and the deposits continue to earn interest for customers. Therefore, MAB cannot be characterized as actual, deemed, or notional consideration for banking services.

The Court also warned that accepting the tax department’s interpretation would effectively result in double taxation, since service tax had already been discharged on penalties collected for non-maintenance of MAB.

Relying on Circular No. 178/10/2022-GST dated August 3, 2022, and Circular No. 214/1/2023-Service Tax dated February 28, 2023, the Court reiterated that a taxable service involving an agreement to tolerate an act or do an act must arise from a separate contractual arrangement supported by identifiable consideration having a direct nexus with the activity. Penal charges for breach of contractual obligations cannot be treated as consideration for tolerating such breaches.

The Bench also noted that in similar proceedings involving South Indian Bank, the tax department had accepted identical contentions and dropped GST proceedings on merits. This inconsistency further supported the banks’ challenge to the impugned notices.

The Court additionally rejected the department’s objection regarding the availability of an alternative remedy, observing that the dispute raised a pure question of law and that the notices lacked a valid jurisdictional foundation.

The petitions were filed by Canara Bank, Bank of Baroda, and Karnataka Bank challenging show cause notices issued by Service Tax and GST authorities for the pre-GST period ending June 30, 2017. The department had alleged that where customers maintained the prescribed MAB and banks did not separately charge for certain facilities, such balances constituted non-monetary consideration for banking services.

Based on this theory, the authorities sought to levy service tax, interest, and penalties under Sections 65B(44), 65B(51), 66B, 66E(e), and 67 of the Finance Act, 1994, read with Section 2(d) of the Indian Contract Act, 1872. The banks, however, contended that MAB was merely a contractual requirement and that only penalties for non-maintenance attracted service tax, which had already been paid.

Accepting the banks’ arguments, the Karnataka High Court quashed the show cause notices and all consequential proceedings, holding that Minimum Average Balance cannot be treated as consideration for banking services and therefore cannot form the basis for a service tax demand.