Banks Haven’t Given Up On Rural Money Transfers Despite GST Woes

A few banks plan to retain their rural cash transfer services despite a higher tax outgo in an effort to attract customers of the lenders that stopped the service mostly used by migrant workers to send money back home, according to a person familiar with the matter.

That comes after a clarification by the Goods and Services Tax Council that banks will have to pay tax on the entire value of the fee charged to customers on the money sent through business correspondents and banking representatives in areas they don't have branches.

Banks are planning to pay 18 percent GST on 1.5 percent of the value of transaction upfront, said the person quoted earlier. He didn't want to be identified as a final decision is yet to be made. The limit has been selected in line with the Reserve Bank of India's guidelines that cap the fee on such transactions at 1.5 percent of the remitted value. The move, the person said, would help lenders avoid the taxman's scrutiny.

In October 2018, Axis Bank has shut its domestic money transfer operations in underserved areas, BloombergQuint had earlier reported. ICICI Bank is also planning to do the same, the person quoted earlier said, adding that RBL Bank and Yes Bank are considering to pay the higher GST as they hope to attract more customers after the exit of two major banks.

RBL Bank and Yes Bank did not reply to an email seeking comment.

A customer wanting to transfer money in and out of an underserved area has to approach a customer service point, like a kirana shop, which uses the facility of a banking correspondent to make the transaction with the help of a bank. The service providers and the bank charge a fee for the transaction. The recent clarification by the government asks banks to pay tax on behalf of service providers.

Around Rs 5,000-6,000 crore remittances take place a month with an average ticket size of Rs 4,000 under the RBI's business correspondent model, which was tasked with increasing banking outreach and ensuring greater financial inclusion, BloombergQuint had earlier reported.

Lack Of Clarity

Banks do not know what value needs to be considered for GST and accounting purposes as they are unaware of the actual fee collected from the person transferring the money, said Sumit Lunker, an indirect tax partner at PwC India, adding that it is not necessary that the customer service point has collected 1.5 percent as fee, but the amount could be lower as well. “The tax authorities have merely relied on the RBI circular which puts a ceiling of 1.5 percent on the fee collected, without knowing the ground reality.”

Banks also plan to change their documentation structure as they have no data of fee collected by the customer service points or banking correspondents, the person said, adding there may now be a proper documentation of the transactions, and banks may send invoices to customers through text messages directly once remittance is done.

Banks, he said, are weighing the inclusion of tax in the fee charged to customers who transfer money via business correspondents, making remittances costlier for financially underserved areas.