YES Bank evaded Rs 330 mn tax via 'cut and pay' scheme: GST authority

Bank refutes charges, says it has consulted experts who have confirmed that their interpretation of the law was correct and tenable

The anti-evasion wing of the goods and services tax (GST) department in Mumbai has alleged that YES Bank evaded central GST (CGST) dues, through a ‘cut and pay’ scheme, to the tune of Rs 330 million. The bank, however, said it had consulted tax experts who confirmed its interpretation of the law was correct and tenable. 

A YES Bank spokesperson stated in an email response to queries sent by Business Standard: “It is in line with the prevalent industry practice across all banks. We will continue to engage closely with the tax department to resolve this at the earliest.” 

Through investigation of transactions over the past five years, the Mumbai Central GST Commissionerate found that the bank has undervalued service charges paid for Direct Money Transfer (DMT) services, through their banking correspondent (BCs) and agents. 

Investigation authorities said that YES Bank is in violation of several sections of the CGST Act of 2017, as well as Reserve Bank of India (RBI) guidelines on the Bank-BC model. 

Axis Bank was found to have adopted a similar practice, as reported in June, and has since repaid its dues with interest to the authorities, said people with knowledge of the matter. 

So what is the ‘cut and pay’ scheme? Banks are allowed to employ BCs/agents to help their walk-in customers conduct DMTs. According to RBI guidelines, banks have to charge a specific and transparent fee directly from the customer for the transfer. The BCs or agents are prohibited from charging customers separate fees for conducting the transaction(s). 

Under the old model, the entire service fee was charged from walk-in customers and went into the banks’ fee account. The bank would then discharge its tax liabilities from the gross amount. 

RBI rules allow BCs and agents to charge customers a service charge of 1.0-1.5 per cent of the transaction value, and earn between 0.2-0.6 per cent as commission. 

Over the past five years, said sources in the tax department, many banks have moved to the ‘cut and pay’ model, where the entire service charge is not disclosed to tax authorities, thereby evading GST. 

Manpreet Arya, Additional Commissioner at the Mumbai Central GST Commissionerate, said: “The bank has charged 1.5 per cent from customers, but is depositing different proportions between 0.5-0.8 per cent with tax authorities. The investigations conducted are for the past five years. We have persuaded the bank to deposit its dues, but if it does not, we may have to pursue more coercive action.”

According to the tax department’s allegations, YES Bank charged 1.5 per cent for every DMT transaction as service fees and thereafter, it raised invoices to their BCs/agents that were lower. As a result, the Mumbai GST department received lower tax revenue. A total of Rs 330 million of GST evasion has been detected so far, said GST authorities.