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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

Absolving Tax Rates under GST for Financial Services Provided by Business Correspondents | White Paper

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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


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.



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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.

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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-

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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


18

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.


19

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

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