Tax authorities are keeping a close eye on financial activities of banks in order to check service tax evasion by them. The Central Board of Excise and Customs (CBEC) has recently also written a letter to its field formations to monitor carefully financial transactions by banks in this regard.

The directive comes in the wake of an audit of the Treasury branch of the State Bank of Mysore (SBM), Mysore. The tax officials detected that service tax on agency commission received for government transactions was being deducted by its nodal bank in Bangalore. But it was not added to the banks total service tax bill by its currency chest branches. Simply put, SBM was paying the tax only on the net commission it earned and was not taking these commissions into account.

Banks typically receive commission on government transactions relating to revenue receipts and payments, including pensions on behalf of the Centre and state governments and payments to account holders under the compulsory Deposit Scheme and Special Deposit Scheme. Other activities such as relief and savings bonds transactions may also be eligible for agency commission based on provisions laid down by the Reserve Bank of India.

The case regarding SBM was first detected in December last year after which the CBEC felt that other banks too may be following a similar practice. It felt that banks either may not be registering their nodal banks with the department for the paying service tax, or alternatively may not be paying the tax on the commission earned by such nodal banks at all.

Sources said this directive is more in the nature of a precautionary measure as most banks do pay the tax wherever required. The case pertaining to SBM may just be a one off case, they added.