Post on 06-Jun-2020
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A White Paper
Absolving Tax Rates under GST for Financial Services
Provided by Business Correspondents
April 2019
Business Correspondent Federation of India
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Contents Acronyms ................................................................................................................................. 3
1. Background ....................................................................................................................... 4
2. Introducing the business correspondent model ................................................................... 4
3. Need for exempting BC services under GST ......................................................................... 7
3.1 CSPs and financial inclusion ............................................................................................ 7
3.2 BC services and its impact on the economy ..................................................................... 9
3.3 Employment creation through delivery of financial services ............................................. 9
3.4 Pan Indian requirement of financial inclusion services ................................................... 10
3.5 Financial Inclusion and GST – A disconnect between letter and spirit .............................. 11
3.6 Reverse charges for BCs ............................................................................................... 16
4. Recommendations........................................................................................................... 17
5. Conclusion ...................................................................................................................... 18
6. References ...................................................................................................................... 19
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Acronyms ATM Automated Teller Machine
BC Business Correspondent
BCFI Business Correspondents Federation of India
BHIM Bharat Interface for Money
CBC Corporate Business Correspondent
CBS Core Banking System
CBIC Central Board of Indirect Taxes & Customs
CGST Central Goods and Service Tax
CSP Customer Service Point
DBT Direct Benefits Transfer
DMT Domestic Money Transfer
FAQ Frequently Asked Question
FI Financial Inclusion
FY Financial Year
GDP Gross Domestic Product
GST Goods and Service Tax
IFSC Indian Financial System Code
IMPS Immediate Payment Service
KYC Know Your Customer
MDR Merchant Discount Rate
NPCI National Payments Corporation of India
POS Point of Sale
PMJDY Pradhan Mantri Jan Dhan Yojana
QR Quick Response
RBI Reserve Bank of India
UPI Unified Payment Interface
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1. Background
Every Indian is “Un-banked” after 2:00 PM and “Under-banked” before 2:00 PM
The World Bank defines ‘financial inclusion’ as individuals and businesses having access to useful and
affordable financial products and services that meet their needs – transactions, payments, savings,
credit and insurance – delivered in a responsible and sustainable manner. In the 2017 ‘Brookings
Financial and Digital Inclusion Project Report’, India ranked no. 12, (with an overall score of 72%),
out of 26 countries assessed on financial inclusion that year, implying that it has a long road ahead in
terms of initiatives in financial inclusion.
However, India can be deemed a pioneer in financial inclusion. The financial inclusion exercise
started in India with nationalisation of banks in order to extend banking activities to the unbanked
population, both in the rural and urban areas. Later on, The Reserve Bank of India (RBI) drew in a
slew of measures such as priority sector lending (1974), establishing regional rural banks (1975) and
adopting service area approach (1989) and self-help group-bank linkage programme (1989, 1990).
Well-known schemes of micro finance initiatives, and business correspondents (BCs) were launched
later on to ensure the expansion of account openings and service more customers beyond bank
branches.
More recently, technological innovations such as ATMs, credit and debit cards, internet banking,
electronic benefit transfer, BHIM, AEPS, IMPS, BBPS and UPI by using mobile technology have
changed the banking landscape in India, reaching out to more of the un/under-banked populace to
provide financial inclusion. The RBI continues to persistently pursue financial inclusion initiatives in
the country (Singh, 2017).
2. Introducing the business correspondent model
Outreach of 30 lakh business correspondents is greater than that of two lakh bank branches
This paper focuses on the ‘Business Correspondent (BC) model of financial inclusion’. In the year
2006, RBI, with the objective of ensuring greater financial inclusion and increasing the outreach of
the banking sector, decided to enable the banks to use the services of intermediaries in providing
financial inclusion and banking services through use of ‘Business Facilitator and Business
Correspondent Model’ (Department of Financial Services, Ministry of Finance, Government of India,
2014)
BCs are individuals/entities engaged by a bank in India (commercial banks, regional rural banks and
local area banks) for providing banking services in unbanked / under-banked geographical territories
both in rural and urban. A BC works as an agent of the bank and substitutes for the brick and mortar
branch of the bank. BCs are also called Customer Service Point (CSP) (Abraham). Interestingly, in this
Agency model, for services like Remittance, the Principle provides limited value addition and most of
the value addition is supposed to be done by BC and CSP. Each of these two entities, build platform
with innovating features, train the network for various services on their platform, engage with local
banks for cash deposit services (at separate contracts without help of Principle Bank), etc.
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Corporate Business Correspondents (CBCs) are entities that have the requisite systems, funding,
knowledge etc. to provide domestic money transfer (DMT) services to consumers along with various
other services as enumerated by Reserve Bank of India. Customer Service Point (CSP) is an outlet
such as kirana store, medical store etc. BCs engage with CSPs to undertake cash management and
logistics required in the course of provision of domestic money transfer services. The relation among
these entities while providing financial inclusion services can be represented as in .
Figure 1: Interconnectedness and FI services provided by Banks, CBCs and CSPs to walk-in service
recipient
Taking stock of the services being provided by the CSPs to customers, the RBI notified certain services provided by CBCs through their CSPs as financial inclusion services (circular No. RBI/2010-
11/217 DBOD. No. BL. BC. 43/22/01.009/2010-11) dated September 28, 2010.
Figure 2 is a representation of all the financial services provided by the BCs.
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Figure 2: Financial services being provided by CSPs to customers
Note: Bank pays fee to CSP from their own pocket in most of the services and ONLY in case of
remittance service to non-customers, the CSP has to collect the fee, which, is exempt on him up to 40
lakh but the procedural suffocation in interpreting has limited the growth of this service.
Thus, today, the following impact of the work done by CSP can be summarised as:
Figure 3: Impact of financial inclusion services provided by CSPs
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The BC model (erstwhile Bank Mitra model) saw traction and relevance under the Pradhan Mantri
Jan-Dhan Yojana (PMJDY) scheme. PMJDY was launched in 2014, under which every Indian family
was to be enrolled in a bank for opening a zero balance account. The scheme not only provides the
families to have bank accounts but it also offers different benefits to the poor families who open an
account. Benefits range from getting a RuPay debit card, life cover of INR 2,00,000, insurance with
accidental cover of INR 1,00,000 an over- draft limit of INR 5,000 and easy transfer of benefits
through Direct Benefit Transfer (DBT) and access to various pension and insurance products. The
PMJDY evolved around using the services of the CSPs, acting in the capacity of ‘last mile
infrastructure’ across urban and rural areas. Earlier it was envisioned to have a CBC for every 1000-
1500 households, with minimum remuneration of INR 4,000/month. (This has been discontinued by
the Banks and only a meagre per transaction fee is shared with CBC now, that too with 27% impact
of GST on CBC and CSP, thereby squeezing their viability).
3. Need for exempting BC services under GST
3.1 CSPs and financial inclusion
CSPs have enthusiastically participated in nation building by implementing, promoting and providing
financial inclusion in general and PMJDY in particular. The beneficiaries of CSPs’ services typically
belong to the low-income group, having low
financial literacy; thereby most often remain
un-banked/under-banked. These are also the
intended beneficiaries as per CBIC circulars
who have accounts in rural villages where
their families live and mostly they have a
PMJDY Account, but they don’t utilise Bank
Branch services and visit the CSP only. Most
certainly, the CSP are visited for financial
inclusion services by this customer segment only.
Customers served by the CSPs belong to low income migrant group. The migrant population moves
inter/intra- state in search of livelihood. This mass is the backbone of urban and industrial gentry
and serve as a driver, domestic help, plumber, electrician, mason, small scale vendor, worker at
factories/shops on temporary or permanent assignment and send back home a paltry sums of INR
2,000 to 5,000 a month through CSP channel to avoid wasting their productive working hours during
bank time.
The Indian migrant population was around 453 million (45.3 crore), forming 37% of the Indian
population (Census 2011). This population has seen a steady growth of 4% due to economic
development.
Before the BC era, migrants would generally resort to other non-banking channels of remittances,
which are largely not trustworthy.
Figure 4: Remittance methods used before BC model
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Major portion of this migrant population earns around 5,000 to 30,000 a month. They remit a part of
earnings to their family, for their sustenance (INR 2,000 to 5,000 a month and exceptionally up to
25,000 as per RBI permission limits). Migrants in urban areas go to CSP near them to send/remit
money to their home in rural areas or save in their PMJDY accounts. Persons in rural areas use CSP
near them to avail DBT, deposits and cash withdrawals etc mostly from their PMJDY Accounts or
other accounts in the rural area bank branches. Similarly, people in rural areas go to CSP near them
to save or send/remit money to children studying in urban areas who in turn withdraw money from
CSP near them in the urban area (represented in Figure 5).
Figure 5: Process of delivering financial inclusion services availed by migrant population from CSPs
However, the introduction of the CSPs and varied services offered by them has resulted in achieving
close to INR 60,000 crore worth transactions from nearly three lakh CSPs, serving around 5 crore and
plus Indians (October 2017 - September 2018). Table 1 below gives a snapshot on the transactions
by CSPs, with a split among urban and rural origination.
Table 1: Details on number of CSPs, transactions by them and customers served
Particulars Urban* Origination Rural* Origination
Transactions (in Lakh) 1,207 588
Transaction Value (in INR cr.) 41,332 15,988
Number of CSPs 1,81,945 95,826
GST Registered CSPs 1,241 271
Number of Customers Served 4,05,64,446 93,21,587
Source: BCFI data for October 2017 to September 2018.
*Classification of Urban and Rural as per RBI
Thus, with their growing importance in enabling banking services in underserved urban and rural
areas, the RBI issued guidelines that BC outlet is also a ‘Banking Outlet’ inter alia for increasing bank
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presence for the purpose of opening outlets in underserved areas (vide its notification on May 18,
2017: No. RBI/2016-17/306 DBR.No.BAPD.BC.69/22.01.001/2016-17.)
3.2 BC services and its impact on the economy
The BCs and CSP form an important role in the economy by directly providing services as well as
indirectly contributing to the coffers of the government by bringing informal economy to formal
main line banking.
As expressed in the previous section, taking
the example of migrant workers availing
CSP’s services, it is evident that the worker
saves time from waiting long hours in queues
in the banks. Thus s/he is able to devote the
extra time at work, in turn increasing
economic activities of the business/ factory
s/he works in. It’s a win-win situation for the
employer and the employee.
The worker earns more income and either
remits or saves more in banking system
through CSPs’ services. The remitted money
further is used to purchase goods- aiding the
growth of the economy, while the saved
money in banks is used to fund the
development of National infrastructure
through lending to SME and large corporations.
Overall, through the CSP channel, migrant workers contribute to increasing the productive output of
industries which leads to yielding more tax to the government and its coffers as well as tax from the
increased purchases done by the workers, ultimately helping the economy grow.
3.3 Employment creation through delivery of financial services
The CSPs are typically unemployed individuals / small shopkeepers selling grocery, mobile
recharges/repairs etc. The BC sector has created 7.86 lakh jobs through CSPs and there is potential
to further employ over 20 lakh youth in the immediate term. The CSPs work for nearly 15 hours a
day and earn around INR 10,000 to 15,000 in a month. Table 2 gives a picture of the number of CSPs
across India, engaged in providing financial inclusion services.
More work
More income earned
More purchase/
savings
Increased monies in
coffers
Figure 6: Services provided by BCs and impact on
the economy
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Table 2: Number of CSPs across India
Particulars Urban* Origination % Rural* Origination % Total
Number of CSPs 6,12,665 78 1,74,075 22 7,86,740
GST registered CSPs 1,438 0.23 571 0.33 2,009
Source: BCFI data from April 2018 to September 2018
*Classification of Urban and Rural as per RBI
3.4 Pan Indian requirement of financial inclusion services
Need of financial inclusion services is a pan India phenomenon- regardless of rural or urban areas. In
the case of the low-income migrants mostly served by the CSPs, the migrants, both in urban and
rural areas go to their nearby CSPs to deposit/ withdraw and/or remit money to their homes and
avail other financial inclusion services such as transfer of benefits under various government
schemes. The CSP are a low cost infrastructure, easy to access during convenient hours for mass
India and mostly utilised by the poorer strata and migrants having PMJDY Account in Urban or
accounts in Rural areas.
In spite of having a lower cost option to remit money through bank branches, migrants understand
the impact on their family income by losing a day in the bank queues and hence take help of CSP
near them to avail various financial services i.e. remit money to home etc. Although the migrant
population accounts for only 37% of Indian population (Census 2011), this segment is growing at a
steady rate and the number of transactions and quantum of transaction by this segment of migrants
is steadily increasing. Given that migrants mostly migrate to the urban areas in search of jobs, it is
natural that the remittances from urban to rural areas are more in number. In the first half of FY18
alone, CSPs have catered to remittances from the migrants to the tune of INR 33,228 crore, with
80% of the transactions originating from urban areas, as shown in Table 3.
Table 3: Urban v/s rural remittances through CSPs
Particulars Urban*
origination %
Rural* origination
% Total
Remittances (INR cr.) 26,687 80% 6,541 20% 33,228
CSPs Count 6,12,665 78% 1,74,075 22% 7,86,740
GST Registered CSPs 1,438 0.23% 571 0.33% 2,009
Count of Customers 4,05,64,446 81% 93,21,587 19% 4,98,86,033
Source: BCFI data from members for the period April 2018 to September 2018.
*Classification of Urban and Rural as per RBI
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3.5 Financial Inclusion and GST – A disconnect between letter and spirit
In the year 2017, The Goods and Service Tax (GST) Act was passed ushering India into an era of
a comprehensive, multi-stage, destination-based tax that is levied on every value addition stage.
Thus, financial inclusion services being performed by the CSPs naturally came under the GST ambit.
However, the Government of India (GoI), through its notification: No.12/2017-Central Tax (Rate)
Serial No.39, Heading 9971 has waived GST on financial inclusion services for accounts in rural areas,
as seen in Table 4.
Table 4: Notification (No.12/2017-Central Tax (Rate) Serial No.39, Heading 9971) permitting NIL tax rate for ‘services of business facilitator or a business correspondent to a banking company with
respect to accounts in its rural area branch’
In tune with the above notification, the Central Board of Indirect Taxes and Customs (CBIC) have
already approved NIL GST for Rural and PMJDY account holders. However, the Notification has
overlooked the following challenges:
i. With technological advancements, National Payment Corporation of India (NPCI)’s Immediate
Payment Service (IMPS) is being utilised by the CSPs for remittances. Moreover, all banks are
on centralised Core Banking System (CBS), thus a single Indian Financial System Code (IFSC) is
Sr. No Heading (Tariff)
Description of Services Rate (in %) Condition
39
Heading 9971
Services by the following persons in respective capacities – (a) Business facilitator or a business correspondent to a banking company with respect to accounts in its rural area branch; (b) any person as an intermediary to a business facilitator or a business correspondent with respect to services mentioned in entry (a); or (c) Business facilitator or a business correspondent to an insurance company in a rural area.
NIL
NIL
From the perspective of GST revenue loss, a 1% fee on total remittance value of INR 57,320 crore
would amount to INR 573 crore and 18% GST on this would amount to INR 103 crore. Of this GST
amount, at least INR 20 crore is already paid by the CBC and the Bank and as per CBIC intention to
waive the GST on Rural account and PMJDY Account, the rest INR 83 crore would have been
exempt, but in want of a simplified implementable circular. That too, if the Government can
assuage the service eco system, this intended exemption would be more than made good by the
productive hours put in by the labour force at their work places. (5 hours a month X 12 months by
5 crore labourers = 300 crore man hours of productive work can at least yield INR 10 per
productive hour and yield an industrial output of INR 3,000 Crore and an 18% GST on that would
yield INR 540 crore annually). Clearly a 1: 7 benefit accrues to the Government by waiving INR 83
Crore of GST since the productivity yields INR 540 Crore of additional GST.
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used for remittance into any account of a Bank. Hence at the time of remittance, the
originating bank and its CSP does not know if the beneficiary account is in a rural area or not.
It is not possible to identify location of bank account due to this reason.
ii. During remittance and other services to a user, the CSP of originating bank does not know if
the terminating bank’s customer’s account is a PMJDY account or not.
iii. This has created a challenge in the industry since if one collects GST, it is wrong and if one
skips GST collection, it may be wrong. Thereby the intended exemption goes in vein and puts
all the BCs in violation already since they now collect GST and pay to Government being
conservative.
Remittance services offered by CSPs require value addition by various service providers in the chain
in terms of platform, training, funding, system, connectivity, rent, salary and cash deposit charges.
Value addition being a core principle for payment of GST, accordi ngly, the Sponsor Bank, CBC and
CSPs pay their applicable GST for value added by them individually in financial inclusion service. This
is in sync with the spirit of GST FAQ- which clarifies that CSP are neither places of business or fixed
establishments from where banks ordinarily carry on their business. Although BCs act as agents of
the bank by providing financial inclusion products, for taxation purposes however, the BCs and CSPs
are treated as independent service providers to the bank, which are subject to GST.
Figure 7: Value added based GST levied by each party during provision of financial inclusion
services
However, due to difference in interpretations by GST officials (as against the banks), these actions
have made banks potentially liable for paying full GST amounts even in cases where the customers
may not belong to the bank and tax demand has been raised even for the services provided by other
entities involved in the transaction (CBCs, CSPs, training providers, Technology service providers and
local banks charging cash deposit fee). Further, since the Banks are allowed only 50% input credit,
the burden is passed to the CBC/ CSP, thereby squeezing them of wafer thin margins. This results in
double taxation and makes the Bank Mitra services unviable.
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Ignoring government’s public policy and RBI guidelines promoting financial inclusion, the officials
insist on an old circular which prohibited CSPs to levy charges on the banking services. Other
circulars of RBI are not being considered for discussion. Even GST FAQ clarifications are being left
aside. For value added by the entire value chain (Banks, Corporate Business Correspondents-CBCs
and Customer Service Points) the Bank is being forced to become liable for the GST, even though the
CSP is exempt till 40 Lakh of turnover. Double impact of taxation on financial inclusion services to
citizens due to 50% input credit to Banks, leads to overall cascading impact of 27.26% GST on
financial services being provided by CSPs to the under-banked poor. This is in compelling contrast to
the INR 600 crore spent by Government on DigiDhan Yojna last year to promote digital payments by
savvy customer segment and yet another INR 1,000 crore on NIL MDR for card payments this year. In
contrast to this, the cost of INR 100 crore on GST exemption for the mass migrant population
struggling to meet two times food is beyond compassion.
Let’s now explore the RBI guidelines and their intent over the years on this particular issue :
Sr.
No
Circular reference Quote Interpretation
1 Financial inclusion by
extension of Banking
Services – Use of
Business Facilitators
and Correspondents
dated January 25,
2006
[RBI/2005-06/288
DBOD.No.BL.BC.58/2
2.01.001/2005-2006]
Para 4, Page 2:
The agreement with the Business
Facilitators/ Correspondents
should specifically prohibit them
from charging any fee to the
customers directly for any
services rendered by them on
behalf of the bank.
Since the Banks were operating in
Onus environment to mainly open
bank accounts through its BC Agents
in those days to facilitate balance
inquiry and small deposits in their
own account, these banking services
were anyways free at Branches. The
RBI wanted the banks to pay to the
BC Agents instead of charging the
“Customers of Bank”.
(Note - Interoperability to non-
customers was allowed later in 2012)
2 Domestic Money
Transfer -Relaxations
Dated October 5,
2011
[RBI/2011-12/213
DPSS.PD.CO. No.
622/02.27.019/2011-
2012]
Para 4 e, Page 2:
Banks/non-banks may fix reasonable charges to popularise
the scheme.
In contrast to “Bank charging fee to
Customers”, RBI relaxed conditions to
permit growth of service and allowed
Bank/non-bank to fix a last mile price
to popularize DMT services amongst
“walk in users without KYC”. On this
basis, the industry fixed 1.50% as
maximum price at last mile in
contrast to 5% fee charged by Post
offices. Since this was not a customer
of the bank, the bank could not
charge the fee from user and the
Retailer would collect the fee for his
services.
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3 Interoperability to
allow service to non-
customers
Dated March 02,
2012
[DBOD.No.BL.BC.82/2
2.01.009/2011-12]
Para 2, Page 1:
“It has been decided to permit interoperability at the retail outlets or sub-agents of BC’s (i.e. at the point of customer interface), provided that technology available with the bank, which has appointed the BC, supports interoperability, subject to the following
conditions:
a. The transactions and authentications at such retail outlets or sub-agents of BCs are carried out on-line;
b. The transactions are carried out on Core Banking Solution (CBS) platform;
and
c. The banks follow the standard operating procedures to be advised by the Indian Banks'
Association (IBA).
However, the BC or its retail
outlet or sub-agent at the point
of customer interface would
continue to represent bank,
which has appointed the BC.
Fact that the 2006 and 2010
circulars had advised about service
to “Customers” and envisaged that
the Bank should charge the fee to
customer and not the BC.
Subsequent circular on Relaxation of
DMT to popularise it among walk in
non-customers and then this
circular on Interoperability to serve
“non-customers” was issued by RBI.
Directionally, it clearly suggests that
serving non customers at a fee to be
charged by Retailer Agent is
permissible within the “Fixed fee” as
permitted by the partner bank.
4 NEFT – Customer
Service and Charges
Dated Jan 21, 2014
[DPSS.CO.EPPD
No.1583/04.03.01/20
13-14]
Para 6. c. Page 2:
“Ensure that the charges levied on the customers for inter-bank NEFT transactions at both branch locations and CSP/BC/agent locations are at par. Further, it should be ensured that the customers should not be forcibly diverted to BC/CSP/agent
RBI advised that Banks should not
force the customers to avail service
from BC Agent outlets at higher fee
and thus advised the Banks serving
“its customers” through BC Agents,
to charge same NEFT fee at Branch
and BC Agent outlets. This certainly
is with the underlying support to the
Agent for cash deposit at the
sponsor bank for “Free” and there
are no extra charges to them.
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locations from the branches for
conducting NEFT transactions.”
Hence, the Banking services moved
out from Bank branches to BC Agent
could be advised to be at same fee.
Since in the earlier circular of 2011,
RBI permitted to fix a fee to
popularise the service and vide
circular of 2012 permitting
interoperability, RBI enabled
customers of other Banks to be
serviced from BC Agent outlets, the
fee for additional effort of BC Agent
would be still chargeable by the
Retailer Agent only and bank could
not collect the fee.
5
Waive 30 km
distance criteria
between supervising
bank branch and the
BC’s place of business
to provide
“operational
flexibility” and “in
view of the
technological
developments in the
banking sector”.
Dated June 24th, 2014
RBI/2013-14/653
DBOD.No.BAPD.BC.1
22/22.01.009/2013-
14
Para 2 ii) Page 2:
“With a view to providing
operational flexibility to banks
and in view of the technological
developments in the banking
sector, it has been decided to
remove the stipulation regarding
distance criteria.”
In digital environment, RBI guided the
industry to granulize and re configure
the best of services of various
partners and banks to reach out
financial services to the customers
across the nation. A new age bank
with technology capability could now
configure services of cash deposit and
NEFT at local branch of any partner
bank and service its BC Agent to
manage cash. One could take
advantage of technology and training
partners to ensure continuous
training of Agents in distant areas and
service customers or non-customers
in interoperable manner, facilitating
charge of fee from customer through
the Retailer Agent and pay the Agent
for various value additions done by
him at local level. The Operational
Flexibility helped the industry to
reach basic deposit/remittance
services to places where the new age
banks did not have their branches and
other banks were not able to service
the citizen in local area for such
important services.
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Clearly, over the years, RBI has appreciated the importance of digital services and permitted banks
to set up retailer Agents in any place to offer services to citizen (Customer or not). From the stage of
allowing banks to charge fee from their customers, RBI permitted the Banks / non-banks to “Fix” a
fee to popularise the services, ensure that there is no customer grievance in case of branch in
proximity pushing customers to avail paid services at higher fee at nearby Agent. Circulars on
Interoperability and removal of Distance criteria have been hailed world over by everyone as a
defining moment in Agent Banking services in technology era.
Below, given in Table 5, is an example depicting the burden of levying 27.26% GST on poor
unbanked/under-banked Indians:
Table 5: Computation of impact of 27.26% GST on poor unbanked/under-banked Indians
Remittance Amount (in INR) A 1000.00
Collective fee of Bank, BC, CSP B 1% 10.00
Fee component (B / 118%) C 8.47
GST component (B - C) D 18% 1.53
Input Credit to Bank (H) * 50% of (I) E 50% 0.65
Net GST to Bank F 50% 0.88
Gross Fee to BC (100% is passed to the BC) (C * G %) G 100% 8.47
Fee component (G/ 118%) H 7.18
GST component (G -H) I 1.29
GST collected by BC J 1.29
Input credit for office/computer rent etc. K 0.03
Total GST in INR 10/- (F) + (I) – (K) L 2.14
Net Fee in INR 10/- (B) - (L) 7.86
Total GST in transaction (L) / (M) % 27.26
Impact: Entire 27.26% GST is being borne by the poor unbanked/under-banked customer.
GST officials at Mumbai have made the banks to pay GST on entire fee of financial inclusion services,
whether applicable to CSP or not. This has resulted in massive reduction in transaction volumes,
while some of the banks have stopped offering remittance services through BC channel altogether or
allowing few BC to continue basis a declaration that any additional GST liability shall be borne by the
BC and CSP. It has also been observed that banks have resorted to reduce the remittance fee and
additionally levying GST on the CBC and thus end CSP in order to negate the double taxation effects
on them.
As mentioned under GST, the CSPs are individual service providers and subject to GST and are
separate from the sponsor bank for the purposes of taxation under the CGST Act. Thus any fees
charged by such individual CSPs is not part of the service fees charged by banks for providing
banking services in light of the RBI and GST regulations. Thus, this practice vitiates the benefits of
financial inclusion being accrued by the low income migrant population, by overburdening the latter
(end user) with high amount of tax.
3.6 Reverse charges for BCs
Reverse charge is a mechanism where the recipient of the goods and/or services is liable to pay GST
instead of the supplier. In the case of reverse charge, the receiver becomes liable to pay the tax. In
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case of CSPs, a miniscule number (nearly 0.3%) are GST registered (Table 2 above). Thus, when a CSP
not registered under GST performs financial inclusion service on behalf of a GST registered service
provider, then reverse charge would apply on the service provider/ party concerned.
The purpose of reverse charge is to identify end points; it has no tax implication on the service.
Given that a majority of the CSPs are not required to be registered under GST (Table 2 above) and
small- scale retailers dealing with few transactions on a daily basis, hence, the implementation of
reverse charge would add an immense quantum of paper work and administrative hassle and cash
flow issues for all the parties concerned/ service providers (all along having no adverse tax
implication).
4. Recommendations
As is evident from above, there are significant challenges and confusion not only in imposition and
collection of GST on FI services, the paradox of location, as also the onerous requirement for CBCs to
register in all states and follow RCM even though the underlying small service providers are way out
of the GST turnover definition. All these have resulted in making the delivery of FI/PMJDY services
unviable for the BCs on the one hand and also resulting in taxing the poor unbanked Indians on the
other. It may not only spawn unscrupulous informal/ non-banking channels but may also give rise to
a huge discontent due to deficient/denial of financial services; which may result in queuing up at
bank branches for 5 hours every month, leading to crowded bank branches and reduced productive
hours at their work place with impact on their daily wages and render over 7.86 lakh youth presently
working as CSPs unemployed, thereby hampering GDP growth.
In light of the above, the following recommendations are being advocated in this paper:
i. Reiterate that the CSP work of financial inclusion being offered on the basis of interpretation
of guidelines by Justice BN Srikrishna and the industry is correct and decoupling of banking
in digital era is best way to service customers in the value added tax regime and each service
provider adding value in the chain should pay their applicable taxes.
ii. In the opinion of Justice BN Srikrishna, he has reiterated that only the consideration for
service rendered by the bank to the BC can be said to be value of service liable to be taxed
under the service tax and GST statutes. These are the factors on which basic liability to
service tax and GST has to be determined and not by the manner in which earlier RBI
guidelines- which permit carrying on domestic money transfer (DMT) transactions.
iii. Provide instant relief to banks which are being affected by the interpretation so that
remittance services do not suffer.
iv. Clarify that the value of exempt services provided by CBC or CSPs should not be included in
the taxable value of service provided by banks for levy of GST and that there is no intention
of the GoI to levy 27.26% GST on service to poor segments.
v. In view of the nation’s interest in making India ‘business friendly’, reverse charge for CSPs
for financial inclusion services through BCs should be relaxed as all corporate banking
correspondents (CBCs) are registered and pay the required tax
vi. The financial budget in spirit waived service tax on financial inclusion services reached to last
mile but the heading 9971 (Table 4) in letter says GST is waived for accounts of the bank in
rural area. From Table 3, it can be deduced that most of the money indeed goes to rural
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centres from urban centres thereby bringing the true financial inclusion. However, the fact
of the matter is that financial inclusion at CSP is required across urban and rural both and
hence the heading 9971 should be applied to all financial inclusion services at CSPs pan
India. Taking cognisance of this, GST at NIL rate should be levied on remittance services
rendered by CSPs (and on all other financial inclusion services as notified by RBI) across India
(regardless of area), whether the CSP is GST registered or not.
5. Conclusion
From the above analysis, it becomes most logical to levy GST at NIL rates for financial inclusion
services provided by BCs across India. This would then result in solving the issue of reverse charge;
having no need to deposit reverse charge by the CBCs. This in turn will not only reduce the
enormous paper work and administrative hassle that accompanies reverse charge payment, but
would take India one step closer to becoming ‘business friendly’ by all owing single registration of
CBC in its registered/head office state, simultaneously allowing the CBC to avail services from
unregistered CSPs across India who are
mostly not required to be registered
under GST.
The case study in Box 1 is an example of
the extent to which the government,
regulating authorities and the citizens of
India have harmoniously participated in
achieving a noble initiative of promoting
cashless transactions thereby promoting a
Digital India.
Likewise, it is intended for the
government, with support from the RBI to
exempt remittances/transactions of low
value, undertaken by CSPs from GST.
The government has already expressed its
good intention of encouraging financial
inclusion services through the CSPs, by
waiving GST for accounts of the banks in
rural areas and PMJDY accounts. On the
same lines, this paper intends to create a
positive influence on the government
towards extending the waiver on all
financial inclusion services rendered by
CSPs across India (regardless of the area
as urban or rural since rural migrants work in urban centres and remit funds to their f amilies in rural
area accounts)
Box 1: Waiver of MDR for transactions under INR
2,000
In the debit card/ Bharat Interface for Money (BHIM)
Unified Payment Interface (UPI)/ Aadhaar- Pay
payment ecosystem, when any payment is made at a
merchant point of sale (POS) through a POS machine
or quick response (QR) ‘scan and pay’ or online mode
of payment, merchant discount rate (MDR) charge is
payable by the merchant to his bank (acquirer). A
portion of this is shared by the acquirer bank with
the card issuing bank and the card network operator.
Under the Digital India Program, the government
decided to reimburse the MDR charges on small
transactions less than or equal to Rs. 2,000/- in value.
The MDR on such transactions for the merchant
would effectively become zero; hence they would
come on par with cash transactions. The RBI issued a
directive on December 6, 2017, revising MDR
applicable for debit card transactions with effect
from January 1, 2018. Point to note: Easy
implementation of a scheme by identifying amount limit of
each transaction and waiving MDR charge ACROSS ALL
MERCHANTS rather than for PMJDY accounts alone.
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6. References
Abraham, R. K. (n.d.). Banking Crrespondent (BC). Retrieved March 8, 2019, from Arthapedia:
http://www.arthapedia.in/index.php?title=Banking_Correspondent_(BC)
Department of Financial Services, Ministry of Finance, Government of India. (2014, August 23).
Pradhan Mantri Jan- Dhan Yojana. Retrieved March 8, 2019
Singh, C. (2017, September 1). Jan Dhan at Three: Need for Linking Financial Inclusion to
Socioeconomic Development. Retrieved March 8, 2019, from The WIRE:
https://thewire.in/economy/jan-dhan-three-need-linking-financial-inclusion-socioeconomic-
development