Shares of Jammu and Kashmir Bank Ltd (J&K Bank) dropped nearly 4% in Wednesday’s trading session after the bank received a GST tax demand and penalty totaling Rs 16,322 crore. This amount exceeds the bank’s market capitalization of Rs 11,210 crore, leading to a sharp decline in its stock price.
The stock fell by 3.83%, reaching a low of Rs 99.35 on the Bombay Stock Exchange (BSE). In response, J&K Bank assured that it has a strong case and believes that the demand is without legal basis. The bank’s statement emphasized that it has received expert opinions which support its position, and it expects the court to rule in its favor.
J&K Bank clarified that the GST demand relates to the interest under the transfer pricing mechanism (TPM) between the bank’s corporate headquarters and its branches. The demand pertains to the period from July 8, 2017, to March 31, 2020. The bank stated that the interest on funds transferred under this internal mechanism was treated as a financial service, which led to the imposition of GST.
TPM is a system used by banks to allocate funds between different business units. It helps determine the pricing of loans, investments, and deposits, and is essential in measuring a bank’s profitability. J&K Bank explained that TPM entries are notional in nature, and the related expenses and income are nullified when preparing the bank’s overall financial statements.
The bank also noted that the Reserve Bank of India (RBI) had issued guidelines in 1999, under which all banks in India, including J&K Bank, adopted the TPM framework. The bank reiterated that these transactions should not be treated as financial services that attract GST.
Despite the significant tax demand, J&K Bank expressed confidence that the matter would not impact its financials, operations, or other activities. The bank has taken legal action to challenge the demand, and its experts believe the tax demand will be dismissed by the court.
