BENGALURU: Private banks that are being charged goods and services tax on transactions undertaken by their business correspondents are starting to increase their charges on remittances, two people aware of the development said.
At least two large private sector lenders in the domestic money remittance business have increased charges by at least 20 basis points, they said, declining to name the banks. A basis point is one-hundredth of a percentage point. Some banks have sought legal opinion on the matter and are looking to arrive at an understanding with tax authorities, ET has learnt.
Business correspondents, or bank mitras, as they are popularly referred to, provide fund transfer, withdrawal and cash deposit services on behalf of banks in far-flung areas.
“As a direct result of the tax notices slapped on few private banks, two major players in this space have increased the cost of these services by 20 basis points, taking the rate to 1.2% of the transaction amount,” said Anand Kumar Bajaj, chief executive officer of PayNearby and cochair for communications at the Business Correspondents Federation of India.
“The increase in cost will eventually get passed on to the consumers, who, in this case, are ones without direct access to full banking channels.”
Banks can charge up to 1.5% of the transaction amount from their customers. But because of high competition in the space, multiple players reduced their charges to 1%, Bajaj said. Bankers say that for them to pay tax on fees made by the retailers at the end-point would cause a huge burden. The issue on pricing has cropped up mainly with private banks that offer remittance services. A top executive with a business correspondent agency said that unlike public sector banks, private banks do not have a huge spread of branches.
“Therefore, we have to rely on local branches of other banks for cash management services and we used to charge customers according to the cost that we incurred,” he said. “Now, levying GST on the sponsor bank for the entire charge is causing trouble.”
Nihal Kothari, leader, indirect tax practice, at law firm Khaitan and Co., said a GST of 5% could be levied on this space since it helps promote financial inclusion, and that full input credit on the sponsor bank would help ease the pain. “The decoupling of various modules of financial services is the way forward in the era of value-added tax regime, under which each service provider in the value chain should contribute GST on his/her service component at applicable GST rate,” he said.