Three Mumbai-based private banks and a payments bank are being probed for allegedly evading Rs 100 crore of Goods and Services Tax (GST) and flouting RBI guidelines on money transfer. The entities are suspected of evading GST by under-reporting the value of the funds transferred for customers.

A senior official at the Central Goods and Services Tax confirmed the development to Moneycontrol.

Domestic Money Transfer Services

Banks provide money transfer services to customers through an entity dubbed corporate business correspondent (BC). To promote financial inclusion, RBI norms permit banks to engage companies, excluding NBFCs, registered under the Indian Companies Act, 1956, as business correspondents. According to the norms, bank providing money transfer services is permitted to levy a “reasonable charge” to a customer in a transparent manner and that its agreement with business correspondents should “specifically prohibit” the entity to charge any fee from the customer.

Modus Operandi for Tax Evasion

The Mumbai Central Commissionerate of the anti-evasion wing of Central Good and Services Tax and Central Excise is checking records of the banks to ascertain transactions lawful or wrongful.

“Some banks have been found to be deliberately misguiding the department by raising false invoices to the business correspondents, making it look as if the banks are offering services to customers. This is contrary to their agreement with the correspondents and the RBI guidelines,” a senior official of the department said.

In some cases, the banks were found to have allowed their funds transfer partners to charge customers over and above the fee declared to the CGST body. “There are instances where the banks ignored warnings from the partners warning them of non-compliance and law violation,” the official said. “Banks were found to be knowingly forcing them to adopt such practices without the fear of law.”

The department’s investigation have revealed that banks adopted a model that allowed them to undervalue tax liability up to 95% of the total service charge actually collected from the customer, the official said. “Tax is only paid on 5% of the total service charge collected for providing the taxable service.”

“The offences recorded so far may attract stringent measures under provisions of Section 69 of the CGST Act, 2017 as they are in nature of fraud and willful mis-statement on part of the banks and payment bank,” a source said.

GST Law Misinterpreted?

Moneycontrol has refrained from naming the entities as the government’s investigation is still under way.

Banking officials pin the blame on misinterpretation of the GST laws. The CEO of a bank under scanner said, “We are not aware of any such evasion or payment notice from the government. We have a small remittance business, on which we have paid all our taxes...I think the GST is evolving and the government may have misinterpreted the issue.”

Similarly, a senior executive of a business correspondent firm, “This is a matter of interpretation. Usually, a bank pays taxes on the value it derives from the services it charges the customers. As per regulations, the bank gets the payment of service charged from the customer. But often banks have a contract or deal with the BCs and a part of the payment is received by the BCs, on which the banks will not pay the tax.”