Profit-making co-operative banks cannot escape the tax net. With a large number of such banks making profits, the revenue department has rejected proposals to provide them exemption from income tax and service tax. Backed by strong political lobbies, certain government departments had demanded that these banks should be spared of these taxes. Countering arguments in favour of co-operative banks, the revenue department has said there was no justification for giving a special dispensation to co-operative banks which had grown into full-fledged commercial entities, earning substantial profits from their banking activities.

In fact, the standards of accountability and governance in co-operative banks would improve with this move, as they would also have to adhere to the discipline of producing audited accounts and filing income tax. Under Section 80P of the Income Tax Act, tax benefits available to co-operatives banks will go from April 1, 07. Phasing out of these exemptions is in line with an amendment brought in the last Budget. Co-operative banks, which are set to lose tax benefits from next fiscal, have been crying foul. They have been pressing for the withdrawal of the amendment in Budget 07-08.

The issue was also taken to the PMO. But the revenue department feels that income tax was on profits and there was no rationale in exempting a profit-making co-operative from paying the tax, sources said. Of the 1,08,746 co-operative banks and banking institutions, a large majority has been kept out of the tax net as 1,05,735 primary agricultural societies and 727 primary co-operative agricultural and rural development banks are outside the purview of the amendment carried out in last Budget.

The total number of co-operative banking institutions is 2,284, of which the withdrawal would be applicable on 1,682 which make profits.

The department is also against giving any special dispensation to a certain category of customers of co-operative banks from paying service tax and education cess. The revenue department feels exempting certain categories of customers like artisans, small farmers from these taxes would be end use-based exemption which was against the government's stated policy. End use-based exemptions are prone to misuse as they are difficult to administer.

Also, by giving such exemptions to a select category would be discriminatory and also affect the competitiveness of other such entities. By giving such an exemption, co-operative banks could face difficulty in availing of input credit as they will have to maintain separate accounts in respect of exempted services.