Commercial banks have sought reimbursements from the Reserve Bank of India (RBI) for the service tax paid on government businesses, claiming that it was a service rendered to the central bank.

The 28 public sector banks, Axis Bank, Jammu & Kashmir Bank and HDFC Bank earn substantial income through government businesses though estimates of the service tax paid by them are unavailable.

Banks handle many government transactions for which they are eligible for agency commission. They earn commission on revenue receipts and payments, pension payments of the Centre and state governments and also on special deposit schemes. Except the task of collecting direct and indirect taxes, banks have to pay service tax on all other government businesses.

“This is quite a sensitive issue for us. The government, which levies tax on us, is also our owner and RBI — for whom we render services — is the regulator. We are in a bind,” said the senior executive of a public sector bank. Service tax officials, conducting tax audits, have been raising demands for tax on agency commission received by banks.

During a recent meeting with the Central Board of Excise and Customs (CBEC), it was pointed out that irrespective of whether it is the government or the central bank, the service provider has to pay tax, which can then be passed on to the recipient.

Since RBI is acting as an agent for the Centre and the states for government transactions, banks have been advised to approach the central bank for any reimbursement, an executive at a private bank said.