PM Modi's pet project Jan-Dhan Yojana faces service tax hurdle

MUMBAI: 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 help 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.