Banks may have to shell out service tax on what they pay an RBI subsidiary, to keep part of their deposits insured.

Banks pay 10 paise per annum for every deposit of Rs100 at half yearly intervals to the Deposit Insurance and Credit Guarantee Corporation (DICGC), a fully-owned subsidiary of the RBI, which insures every deposit of up to Rs1 lakh in case a bank fails to fulfil its obligations to the customer.

Recently, the Commissionerate of Central Excise and Service Tax, Large Taxpayer Unit in Mumbai has communicated to RBI that the deposit insurance activity could attract service tax payment with effect from 1 May, 2006.
However, no official decision in the matter has been taken so far.

As such, RBI has written to banks to be prepared for such tax in case such a decision comes through.

This is for the advance information of the insured banks that in case service tax is made applicable on the deposit insurance premium, all the banks may have to pay service tax, at a short notice, over and above the premium being paid as per the relevant rate, a communication by the RBI to banks said.