Revenue authorities have done banks a good turn towards the close of the financial year.

By clarifying that the deposit insurance premium, collected by the Deposit Insurance and Credit Guarantee Corporation (DICGC), is not taxable, the authorities have saved banks, which ultimately would have borne this burden, from paying taxes totting up to a few thousand crore rupees.

The Commissionerate of Central Excise and Service Tax, Large Taxpayer Unit, Mumbai, in its missive to the Corporation in early January 2009 had underscored the fact that deposit insurance activity is liable to service tax (at 12.36 per cent) with effect from May 1, 2006.

The Corporation, which is the sole provider of deposit insurance services for banks, in turn, cautioned banks through a circular in January that in case service tax is applicable on the deposit insurance premium, then all banks may have to pay the same at short notice, over and above the premium being paid as per the relevant rate.

After the DICGC took up the matter with the Commissionerate, the latter cleared the air saying the charges collected by DICGC are not taxable under the taxable service of General Insurance Service.

According to RBI data, banks had deposits aggregating around Rs 34,42,000 crore as of end-September 2008. If the authorities had pressed their claim then a rough, back-of-the-envelope calculation shows that banks collectively would have had to shell out around Rs 4,250 crore towards service tax on deposit insurance for just the first half of the year. The impact on banks could have been several times this amount if revenue authorities demanded arrears from May 2006.

All registered insured banks (commercial banks, including branches of foreign banks in India, regional rural banks, local area banks, and co-operative banks) are required to pay to the DICGC deposit insurance premium at the rate of 10 paise a year for every deposit of Rs 100 at half-yearly intervals.

Governed by the DICGC Act, 1961, the corporation insures bank deposits such as savings, fixed, current, and recurring up to Rs 1 lakh a depositor/bank. The premium paid by the insured banks to DICGC is required to be absorbed by the banks themselves; for depositors, the benefit of this service is free of cost.