RBI’s auto debit rule could cause tax woes for fintech startups

Fintech companies run the risk of attracting a 2% equalisation levy as well as additional goods and services tax (GST) at 18% on part of the money they make through such an arrangement, especially in transactions where an Indian citizen has subscribed services of a foreign OTT player or he/she buys goods and services from a company not based in India.

Payment aggregators Razorpay, BillDesk and PayU have set up platforms—MandateHQ, SiHub and Zion, respectively—that will provide a “bridge” for banks to complete the transactions.

With the introduction of a new intermediary—apart from bank—between the customer and the overseas merchant establishment (Netflix, Apple store, etc.), tax implications have cropped up. The fintech platform provides additional factor authentication, notifications to customers and dashboard for subscription management to banks for a fee.

How equalisation levy—2% charge on any transaction involving a foreign company over the internet—and GST will be charged will depend on the structure of fintech player’s entities and how the transaction is routed, say tax experts. They say there could be a number of ways where the government’s new equalisation levy could come into play.

“The risk of the platforms attracting a 2% equalisation levy on the fee that platforms will charge to merchants exists,” said Girish Vanvari, founder, tax advisory firm Transaction Square. “The 2% equalisation levy — as the definition suggests — is applicable on any overseas transaction and it could be levied even where the merchant or the companies that are charged are not based in India.”

First, if the bank from which the money is being deducted is not based in India or doesn’t have a tax presence in India — the fee or any money charged by the fintech platform will face 2% tax.

The second probability will depend on how the transaction is structured. If the fee received even from an Indian bank doesn’t directly come to an Indian entity — this too could attract a 2% tax.

If the money goes through a subsidiary of the fintech company, say established in Singapore or the UAE before it makes it to the foreign merchant, even these could attract the levy. And there is a GST implication too, say tax experts. If the money deducted from an Indian’s debit or credit card goes via the fintech’s books before it’s remitted in the foreign merchants’ account, GST can come into play, say tax experts.

“Services provided by the fintech companies for validating transactions could attract GST on both the set up fees and transaction fees charged by them,” said MS Mani, partner, DeloitteIndia.

BillDesk and PayU did not respond to ET’s queries. “Our solution does not interact directly with online merchants when they set up mandates for cardholders transacting with them,” said Amitabh Tewary, chief innovation officer, Razorpay. “Razorpay does not charge any fees to online merchants for this service.”

RBI’s new rules that come into force from October 1 mandate that banks can only process auto-debit transactions if they send a pre-debit notification to customers at least 24 hours before the payment.

Most banks neither have technology nor do they wish to invest in it for undertaking such transactions and have instead turned to fintech companies to provide transaction platforms.