RBI Auto Debit Rule Could Cause Tax Woes For Fintech Startups

Mumbai: Reserve Bank of India (RBI)
Automated debit rules can cause tax complications for fintech companies, which the platform has created for banks to integrate into the common electronic mandate platform to ensure compliance.

Fintech companies run the risk of collecting a 2% equalization tax plus an additional goods and services tax (GST) of 18% of the money they make through such an arrangement, especially on transactions where an Indian citizen uses the services of a foreign OTT player or he purchases goods and services from companies that are not based in India.

Payment aggregators Razorpay, BillDesk, and PayU have created platforms – MandateHQ, SiHub, and Zion – that offer banks “bridges” to process transactions.
With the introduction of new intermediaries – other than banks – between customers and stores overseas (Netflix, Apple Store, etc.), tax consequences arise. The fintech platform offers additional factor authentication, customer notifications, and subscription management boards for paid banks.

How the equalization tax is levied – a 2% fee for each transaction a foreign company makes over the internet – and GST depends on the fintech company’s business structure and the way transactions are conducted, tax experts say. They said there could be several ways the new state equity tax could apply.

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“There is a risk that the platform will collect a 2% equalization tax on fees the platform collects from merchants,” said Girish Vanvari, founder and tax consultant of Transaction Square. “The 2% equalization tax – as the definition suggests – applies to all overseas transactions and can also be levied if the dealer or company being charged is not based in India.”

Firstly, if the bank from which the money is withdrawn is not based in India or has no tax presence in India, the fees or money collected by the fintech platform will be taxed at 2%.

The second probability depends on how the transaction is structured. If the fee received from the Indian bank is not directly to the Indian company, it may also be subject to a 2% tax.

If the money goes through a fintech subsidiary, such as in Singapore or the United Arab Emirates, before it reaches foreign traders, they can even collect a fee. And that matters for GST, tax experts say. If money withdrawn from an Indian debit or credit card goes into a fintech’s books before it’s transferred to a foreign merchant’s account, GST could come into play, tax experts say.

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