Incentives To Banks For Promotion Of Digital Payments Are Subsidies, Not-Taxable: CBIC

The Central Board of Indirect Taxes and Customs (CBIC) has clarified that the incentives provided by the Centre to banks for promotion of digital payments are subsidies and thus non-taxable.

“As recommended by the Council, it is hereby clarified that incentives paid by MeitY (Ministry of Electronics and Information Technology) to acquiring banks under the incentive scheme for promotion of RuPay debit cards and low value BHIM-UPI transactions are in the nature of subsidy and thus not taxable,” a clarification issued on Friday (January 13) said.

The clarification was approved by the Goods and Services Tax (GST) Council during its 48th meeting in September. 

The announcement comes days after the Union Cabinet approved an INR 2,600 Cr scheme to incentivise low-value RuPay debit card and Unified Payments Interface- Bharat Interface for Money (UPI-BHIM) transactions for the financial year 2022-23 (FY23). 

Prior to this, the Centre had earmarked INR 1,300 Cr for incentivising RuPay debit cards and BHIM-UPI transactions for FY22. 

In essence, no GST is applicable on the incentives paid by the ministry to acquiring banks under the scheme.

Specifying the rationale behind the clarification, the CBIC noted that the subsidies are considerations paid by the central government to the acquiring banks for providing digital payment services. Unlike RuPay debit card and low-value BHIM-UPI transactions, users have to bear the cost of such transactions for other similar digital payments systems. 

“The incentive is in the nature of a subsidy directly linked to the price of the service and the same does not form part of the taxable value of the transaction in view of the provisions of section 2(31) and section 15 of the CGST Act, 2017,” the notification added. 

The announcement spells some good news for the industry which is already burdened with heavy infrastructure costs and losses owing to the mandate that no processing charges would be imposed on such transactions.

While reports earlier said that the government was looking to revisit the zero-MDR (Merchant Discount Rate) regime, the Centre dismissed any such move. Many have pointed out that it is precisely this zero MDR that has spurred the Indian digital payments ecosystem. 

As per the data released by the National Payments Corporation of India (NPCI), a record 7,404.45 Cr transactions worth INR 125.95 Lakh Cr were processed on UPI in 2022. The space continues to be led by PhonePe and Google Pay. The two players account for nearly half of the market share in terms of both transaction count and transaction value.