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.
“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.
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.
