How RBI’s Auto Debt Rule Could Emphatically Cause Tax Woes for Fintech Startup?

By 03/01/2022March 8th, 2022No Comments
auto debit rbi

Auto Debt RBI Rules for Fintech Startup Companies

In another turn of interesting events, the fintech startups could run into a problem. According to auto debit RBI new rules, Fintech companies run at the risk of attracting a 2% equalization levy. In addition to the equalization levy, the fintech startups will also attract additional goods and services tax (GST) at 18%.

This GST will be attracted on part of the money the fintech startups would make through such an arrangement. This would especially include transactions where an Indian citizen has effectively subscribed to the services of a foreign OTT player.

On the other hand, this can also levy in the case where an Indian citizen buys goods and services from a company that is effectively not based in India. Thus, one could effectively state that the Reserve Bank of India’s significant auto-debit rule could effectively and largely bring tax complications for various fintech companies that are operating in In India.

According to the reports, this will also include fintech startups that had set up platforms for banks to effectively integrate with a common e-mandate platform. This was carried out or done to ensure compliance.

auto debitThis brings various Payment aggregators like Razor pay, BillDesk and PayU under the ambit of the law as these have set up platforms like MandateHQ, SiHub, and Zion, respectively. These had been operating in the capacity to form or provide a “bridge” for banks to complete the transactions.

It is no news that since the introduction of new intermediaries, they have gained popularity in recent years. These intermediaries include platforms like Netflix and Apple stores, functioning apart from the bank. With the increase in popularity, the analysis had shown that they had become an avid link between the customer and the overseas merchant establishment. Due to such arrangement, the tax implications have cropped up and have been introduced by the RBI.

auto debit payments rbiBreaking down the tax structure

It is to be noted that if the tax structure is to be broken down, the equalization levy will constitute up to a 2 percent charge on any transaction which will involve a foreign company over the internet. Additionally, on further inspection, GST that will be charged will effectively depend on the structure of the fintech player’s entities.

Thus, it would depend on how the transaction is routed and the nature of such transactions. Thus, given the ambiguous nature of various forms of transactions that take place, one can state that the government’s new equalization levy could effectively come into play.

In other clarification that has been issued, fintech companies that would attract the 2% equalization levy will be on any overseas transaction or it could also be levied on the company or the merchants that are not based in India. Thus, one can state that such an equalization levy can effectively provide the risk of the platforms charging fees from the merchants.

The businesses that will come under the setup

Firstly, according to analysis, the overseas bank from which the money is being deducted which is effectively not based in India, it will attract an equalization levy of 2 percent. Similarly, these would also include banks that don’t have an emphatic tax presence in India.

The second criterion that will attract tax is the nature and structure of the transactions that will be carried out by the company. In this case, if it is found that a fee that is emphatically received by an Indian bank that doesn’t directly come to an Indian entity, will too effectively attract a 2% tax.

It is to be noted that RBI’s newer laws also include the money that goes through a subsidiary. These subsidiaries are usually of the fintech company, even these could effectively come under RBI’s scrutiny and could attract taxes.

On top of this, there is a GST implication too. GST will come into play if the money that is positively deducted from an Indian’s debit or credit card is done via the fintech’s books before it is remitted in the foreign merchants’ account.

Thus one could effectively state that the services that are provided by the fintech companies in pursuit of validating transactions could actually attract GST on both the transaction fees and the setup fee that is charged by them.

fintech startupit is to be noted that RBI’s newer rules have come into effect from October 1. Since then it has been stated that banks can only process auto-debit transactions if they fulfill the criteria of sending a pre-debit notification to their customers well before time. This is to say that such notifications should be given out at least 24 hours before the payment.

it is to be noted that such a law has been brought into force as many banks do not wish to indulge in such transitions and do not have the technology for undertaking such transactions. Thus, this has led many to instead turn to fintech companies to effectively provide transaction platforms.


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