auto debit rule Tax may bring complications for fintech companies setting up the platform for banks to integrate with a common e-mandate platform to ensure compliance.
Fintech companies risk attracting 2% equalization levy Plus the additional Goods and Services Tax (GST) on 18% of the money made by them through such arrangement, particularly in transactions where an Indian citizen has subscribed to the services of a foreign OTT player or he purchases goods and services from a company based in India .
Payment aggregators RazorPay, BillDesk and PayU have set up platforms-MandateHQ, SiHub and Zion, which will provide a “bridge” for banks to complete transactions.
With the introduction of a new intermediary – other than the bank – between the customer and the foreign merchant establishment (Netflix, Apple Store, etc.), tax implications have emerged. The fintech platform provides dashboards for additional factor authentication, notification to customers and subscription management to banks for a fee.
Tax experts say the equalization levy (a 2% charge on any transaction involving a foreign company on the internet) and how GST will be charged will depend on the composition of the fintech player’s entities and how the transactions take place. He says there could be a number of ways where the government’s new equalization levy could come into play.
“There exists a risk of attracting a 2% equalization levy on the charges that will be charged to traders on the platform,” said Girish Vanwari, founder, tax advisory firm TransactionSquare. “The 2% equalization levy – as defined by the definition – applies to any foreign transaction and can be levied even if the merchant or the companies from which the fee is charged are not located in India.”
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The second possibility would depend on how the transaction is structured. If the fee received from an Indian bank does not come directly to an Indian entity – it may also attract 2% tax.
Even these can attract levies if the money goes through a subsidiary of a fintech company, such as Singapore or the UAE, before it is established. Tax experts say that GST is also included in this. Tax experts say GST may come into play if money deducted from an Indian’s debit or credit card goes through the books of fintechs before being credited to the account of foreign merchants.
MS Mani, Partner, DeloitteIndia said, “Services provided by fintech companies for validating transactions may attract GST on both set up fee and transaction fee.”
BillDesk and PayU did not respond to ET’s queries. Amitabh Tiwari, Chief Innovation Officer, Razorpay said, “Our solution does not interact directly with online merchants when they set mandates to transact with cardholders.” Razorpay does not charge online merchants for this service.
The new RBI rule, which came into effect from October 1, states that banks can process auto-debit transactions only if they send pre-debit information to customers at least 24 hours before payment.
Most of the banks neither have the technology nor want to invest in it to conduct such transactions and instead have turned to fintech companies to provide transaction platforms.