Shares of Jammu and Kashmir Bank Ltd (J&K Bank) fell nearly 4 per cent in Wednesday's trade after the lender received a GST tax demand of roughly Rs 8,161 crore and a penalty of Rs 8,161 crore on the same. This was higher than the bank's entire market capitalisation (m-cap) of Rs 11,210 crore.
Following the development, the stock fell 3.83 per cent to hit a low of Rs 99.35 on BSE. J&K Bank said it has strong case on merits and has reasonable belief on the basis of expert opinion on subject that the demand is without legal justification and will be set aside by the court of appropriate jurisdiction.
"The bank has taken appropriate legal recourse in the matter and based on our assessment and legal course adopted by the bank and expert opinion, we believe that the demand order shall have no material impact on the financials, operations or other activities of the bank," it said.
J&K Bank said the interest receivable under transfer pricing mechanism (TPM) between corporate headquarters and branches from common pool of funds, has been treated as financial services and a GST is levied on it.
The demand notice pertained to the period July 8, 2017 to March 31, 2020 for transfers under the bank TPM. In a bank, the common resource - funds or liquidity is shared by all the business units.
"Therefore the most important function of TPM is to provide a basis for the exchange of funds between different business units of a bank. TPM is an internal allocation and measurement mechanism for determining the pricing of incremental loans/investments/deposits and for determining the profit contribution of various lending and borrowing units of a bank," J&K Bank said.
It further noted that TPM is a critical component of the profitability measurement process, as it allocates the major component of profitability in a bank, net interest margin (NIM).
"It’s a management decision tool and is useful means to identify the areas of strength and weaknesses within the bank. Since the bank is, in law a single legal entity constituting of its corporate headquarter as also all the branches, it is legally obliged to reflect its financial statements prepared under the provisions of regulatory laws applicable to it for its whole entity," it said.
J&K Bank said all the TPM entries are purely notional in nature and when entity level financial statements are prepared, the expenditures and incomes accruing from within the bank on account of TPM interest distribution are nullified.
"The said mechanism has been adopted by all banks in India pursuant to Reserve Bank of India (“RBI”) guidelines dated 07.10.1999, with the subject 'Risk Management Systems in Banks' wherein the RBI provided for evolution of Fund Transfer Mechanism to supplement the Assets Liability Management in Banks," it said.
The J&K Bank like other Banks have evolved the TPM and do not treat transaction recorded under such mechanism as financial service which may attract provisions of GST law.