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Jan-Dhan Yojana Faces Service Tax Hurdle
Bank Mitra
2/27/2015
Jan-Dhan
Yojana Faces Service Tax Hurdle
Financial
inclusion initiatives in the country, including Jan-Dhan Yojana, Prime Minister Narendra
Modi's pet project for the financial sector, is
facing an unexpected hurdle in the form of high service tax because
of an anomaly in tax rules. As a result, banks and banking correspondents
(BCs), a major link between people and banks in the rural areas, are forced to
pay one-and a-half times more service tax than usual. People involved in financial
inclusion, including Jan-Dhan Yojana, says if financial inclusion as a
service is put in the exempt list the Budget, it will give a huge boost to the
PM's pet project.
Consider
this: Suppose a taxi driver in Mumbai goes to a bank to send Rs 1,000 to his
mother in a rural area. The bank charges 1% the amount, which is Rs 10, to the
taxi driver as the cost of transferring money. On this Rs 10, it pays 12.36% as
service tax. Now when the bank employs a BC to send this money to the taxi driver’s
mother, the BC charges some amount to the bank and also a service tax of 12.36%
on what it charges the bank. The bank, on its part, gets back half of the
12.36%, which is 6.18%, it pays to BC as cenvat credit.
So,
in effect, the total service tax paid during the whole transaction is 18.54% or
Rs 1.85 on a service charge of Rs 10. Industry players said this is a huge
burden on customers who have a marginal presence in the financial service
space. In addition, banks' viability in the financial inclusion space is also
stretched. In comparison, most regular services pay tax at the rate of 12.36%
only.
"As
a result of the anomaly in law, effectively for a transaction of this nature
banks have to pay one-and-a-half times more service tax," said Rajiv
Anand, group executive, retail banking, Axis Bank. "Correcting this
anomaly will greatly helps drive remittances within the financial inclusion
initiatives," Anand said.
According
to some estimates, total payment by BCs in India towards service tax was Rs
70-80 crore during fiscal 2013-14 and Rs 45-50 crore during the first half of
fiscal 2014-15. Industry players believe this will keep growing as banks and
BCs expand financial inclusion activities.
"In
the interest of larger national objective of making Prime Minister's Jan-Dhan
Yojana mission successful, and to make banks and BCs viable as well as
self-sustaining in this area, financial inclusion service, as defined by RBI,
should be fully exempted from the service tax," said Paresh Rajde, founder
& chairman, Suvidhaa.
The
service tax department has an option for exemption from paying this tax, but
that is applicable only for rural outreach and services. However, industry
players said operationally it is very challenging to bifurcate rural and urban
activities for a BC company. For example, if a remittance service originates at
an urban location and payment happens at a rural location, it is always
difficult to get tax exemption by proving no-tax claim for one of the
locations. Disagreements between tax payers and the authorities also crop up if
the corporate office of the BC Company is in an urban location, irrespective of
where they provide the services, they said.
Source:
http://economictimes.indiatimes.com/
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