On February 5, 2025, Jammu and Kashmir Bank (J&K Bank) disclosed that it has received a Goods and Services Tax (GST) notice amounting to over ₹16,000 crore. The notice, issued by the Joint Commissioner of the Central GST Commissionerate in Jammu, comprises a GST demand of ₹8,130.66 crore, accompanied by an equivalent penalty of ₹8,130.66 crore.
Background of the GST Notice
The GST demand pertains to the period from July 2017 to March 2020 and is associated with the interest receivable under the Transfer Pricing Mechanism (TPM) between the bank’s corporate headquarters and its branches. TPM is an internal framework used by banks to allocate and measure the pricing of incremental loans, investments, and deposits, thereby determining the profit contributions of various lending and borrowing units within the institution.
J&K Bank has clarified that, as a single legal entity encompassing its corporate headquarters and all branches, it is obligated to prepare financial statements that reflect the entire organization. The bank emphasized that TPM entries are purely notional and, when consolidated at the entity level, the expenditures and incomes from TPM interest distribution nullify each other. This mechanism, adopted by banks in India following Reserve Bank of India (RBI) guidelines from October 1999, is designed to support asset-liability management. Consequently, J&K Bank, like other banks, does not consider TPM transactions as financial services subject to GST provisions.
Bank’s Response and Legal Standpoint
In response to the notice, J&K Bank has initiated appropriate legal action, asserting that it has a strong case on merit. The bank stated, “We believe that the demand order shall have no material impact on the financials, operations, or other activities of the bank.”
Financial experts have opined that the demand lacks legal justification and anticipate that it will be overturned by a competent court. The bank’s confidence in its legal position is underscored by its adherence to established TPM practices, which are integral to the banking sector’s regulatory framework.
Market Reaction and Financial Implications
Following the announcement, J&K Bank’s shares experienced a decline, closing 1.81% lower at ₹101.44 on February 5, 2025. The magnitude of the GST demand, exceeding the bank’s market capitalization of approximately ₹11,273.91 crore, has raised concerns among investors.
Despite the substantial figure cited in the notice, J&K Bank maintains that the demand will not materially affect its financial standing or operational activities. The bank’s assertion is based on the premise that TPM-related entries are notional and do not constitute taxable financial services under GST law.
Industry Context and Regulatory Framework
The issue brings to light the complexities inherent in the application of GST provisions to internal banking mechanisms like TPM. The RBI’s 1999 guidelines encouraged banks to develop fund transfer mechanisms to enhance asset-liability management. These internal systems were designed for performance measurement and resource allocation within banks and were not intended to attract GST liabilities.
The banking industry, guided by these regulatory frameworks, has traditionally not treated TPM transactions as services subject to GST. The current notice against J&K Bank may prompt a re-examination of these practices and could have broader implications for the sector if similar interpretations are applied to other institutions.
Conclusion
Jammu and Kashmir Bank’s receipt of a ₹16,000 crore GST notice has spotlighted the intricate interplay between regulatory guidelines and tax laws in India’s banking sector. As the bank pursues legal recourse, the outcome of this case could set a significant precedent for the treatment of internal financial mechanisms under GST provisions, potentially influencing regulatory and operational practices across the industry.
