Banks are facing uncertainty on the applicability of goods and services tax (GST) on the use of a common brand name of the bank by all its branches and subsidiaries, said two people privy to the development.

Certain lenders have started receiving GST notices regarding the use of the brand by the bank branches and subsidiaries, people cited above said.

The development follows several orders by the Authority for Advanced Rulings (AAR) of Tamil Nadu, Maharashtra, and Karnataka specifying that each entity within a bank with a separate GST number will be considered a distinct entity for tax purposes.

The tax department is of the opinion that it constitutes free service offered to related parties, hence, is subject to GST.

If this is recognized as a service, banks will be required to arrive at a value regarding the cost of such services and GST will be applicable on such cost.

An email sent to the finance ministry seeking comments, remained unanswered.

“Legal fiction created under the law to treat branch office in various states as a distinct person for GST was to ensure that credit belonging to a particular state is passed on to that state," said Pratik Jain, regional managing partner (North), tax and regulatory services at Price Waterhouse & Co.

“Using a common brand by different branches is the manner in which business is conducted and the intent is not to offer a service from one office to the other. The GST Council should examine the issue and clarify on it to avoid prolonged litigation," he added.

Even the use of brand name of banks by group companies is a grey area , said experts. All big Indian banks have subsidiaries for mutual funds, insurance, and other sectors, which also use the brand name.

“In the case of banks, where the logo or brand is used by their group companies, it is an interpretative issue, whether this constitutes a supply or is an inherent function of the holding company. To avoid litigation, it is recommended that a clarification is issued by the Central Board of Indirect Taxes and Customs," said Saurabh Agrawal, tax partner, EY.

Market participants said the situation presents two major challenges. One, banks will be required to calculate the value of its brand, which is a difficult process. “In case of banks, it is not only absence of consideration, but also the absence of service," said Abhishek Rastogi, founder, Rastogi Chambers. “If such matters come up, the right approach would be to move the jurisdictional high court for relief."

Two, banks are not eligible to claim full input tax credit (ITC) for it. GST rules say non-financial banking companies and banks are eligible to claim 50% ITC against services and capital goods. So, if the use of brand name is subject to GST, a bank can only claim half the GST paid as input credit.In contrast, GST laws allow 100% ITC for firms in most other sectors.