31 December 2019

EY Tax Alert

Government prescribes mandatory electronic modes of receiving payments for large businesses

Tax Alerts cover significant tax Executive summary news, developments and changes This Tax Alert explains Notification No. 105/2019 (Notification) and Circular No. 32/2019 in legislation that affect Indian (Circular) both dated 30 December 2019 issued by the Government of (GOI), through businesses. They act as technical the Central Board of Direct Taxes [1] (CBDT) prescribing electronic modes of payment under summaries to keep you on top of the newly inserted Section (S.) 269SU of the Income Tax Act (ITA), which came into effect from 1 November 2019[2]. the latest tax issues. For more information, please contact your The Notification notifies three electronic modes of payments viz. (i) powered by RuPay[3] (ii) Unified Payments Interface (UPI) (BHIM [4]-UPI) and (iii) Unified Payments EY advisor. Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code) as mandatory modes of electronic payments with effect from 1 January 2020 for every person carrying on business if his total sales, turnover or gross receipts in business (turnover) exceeds INR500m during the immediately preceding tax year (specified person). These modes are in addition to any other electronic modes being provided by such person.

[1] The apex body of direct tax administration in India. [2] Refer our Tax Alert dated 21 October 2019 “Government invites applications for prescribing mandatory electronic modes of payment” [3] India’s indigenous [4] Bharat Interface for Money (BHIM) is a payment app

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The Circular clarifies that, from 1 January 2020, the Insertion of S.269SU and specified person must provide the facilities for accepting payment through the above referred prescribed electronic corresponding penalty modes. Further, in view of a new provision in the Payment and Settlement Systems Act, 2007 (PSSA), any charge provision in the ITA w.e.f. 1 including the Merchant Discount Rate (MDR) shall not be applicable on or after 1 January 2020 on payment made November 2019 through above referred prescribed electronic modes.

The Circular also clarifies that a penalty of INR5,000 per The Finance (No.2) Act, 2019 (FA 2019) inserted S.269SU day is applicable in case of failure by specified person to in the ITA to provide that every person carrying on business comply with S.269SU. However, in order to allow sufficient shall provide the facility for accepting payment through time to the specified person to install and operationalize the prescribed electronic modes, in addition to the facility for facility for accepting payments through prescribed other electronic modes of payment, if any, being provided electronic modes, no penalty shall be levied if the specified by such person if his turnover in business exceeds person installs and operationalizes the facilities on or INR500m during the immediately preceding tax year. before 31 January 2020. However, if the specified person fails to do so, he shall be liable to pay a penalty of INR5,000 Furthermore, FA 2019 also inserted a new penalty per day from 1 February 2020 for such failure. provision[9] for levy of penalty of INR5,000 per day in case of default in providing such facility. The penalty shall be imposed by the Joint Commissioner. However, no penalty shall be imposed if the person proves that there were good Background and sufficient reasons for such failure. Furthermore, FA 2019 also inserted a new provision in the PSSA to provide that no bank or provider The GOI has adopted several fiscal and non-fiscal measures shall impose any charge upon payer or payee, either to move towards a less cash economy, to reduce the directly or indirectly, for using the electronic modes of generation and circulation of black money and to promote payment prescribed under S.269SU. This provision applies the digital economy. to all persons regardless of the level of turnover whether or There are low-cost digital modes of payment such as BHIM not it exceeds INR500m in the immediately preceding tax UPI [5], UPI-QR Code, Pay, certain debit cards, year. NEFT[6], RTGS[7] etc., which can be used to promote The above referred amendments came into effect from 1 cashless payments. November 2019. The Finance Minister (FM), in her Budget Speech on 5 July Vide notice dated 18 October 2019, the GOI invited 2019, announced a proposal to make it mandatory for applications from banks and payment system providers business establishments with an annual turnover of more operating authorized payment systems under the PSSA [10], than INR500m to offer such low-cost digital modes of that are willing for their payment systems to be taken into payment to their customers, and no charges or Merchant consideration for being prescribed under S.269SU[11]. Discount Rate (MDR) shall be imposed on customers, as well as merchants. Furthermore, the FM clarified that the The CBDT has now issued Notification prescribing the RBI[8] and banks will absorb these costs from the savings mandatory electronic modes of payments with effect from that will accrue to them on account of handling less cash, as 1 January 2020 and the Circular clarifying the impact of people move to these digital modes of payment. prescribed electronic modes of payments.

[9] Section 271DB [10] As per the PSSA, “payment system” means a system that [5] Unified Payments Interface enables payment to be effected between a payer and a beneficiary, [6] National Electronic Fund Transfer involving clearing, payment or settlement service or all of them, but [7] Real Time Gross Settlement does not include a stock exchange and includes systems enabling [8] Reserve operations, debit card operations, operations, money transfer operations or similar operations. “Authorized payment system” is not defined, but contextually means a payment system authorized by the RBI. [11] Refer our Tax Alert dated 21 October 2019 “Government invites applications for prescribing mandatory electronic modes of payment”

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Notification prescribing mandatory electronic modes Comments of payments The mandate on persons carrying on business with a turnover exceeding INR500m in the preceding The Notification notifies following three electronic modes of tax year to provide prescribed electronic modes of payments as mandatory modes of electronic payments with payment (viz. RuPay debit card and BHIM-UPI), is effect from 1 January 2020 for specified persons viz. another measure adopted by the GOI in its drive against black money and promotion of the digital (i) Debit Card powered by RuPay economy. (ii) Unified Payments Interface (UPI) (BHIM-UPI); and It may be noted that these mandatory modes are in addition to other electronic or conventional (iii) Unified Payments Interface Quick Response banking (cheque, draft, etc.) modes voluntarily Code (UPI QR Code) (BHIM-UPI QR Code). offered by the person. For instance, if a specified These modes are in addition to any other electronic modes person is presently accepting debit/credit card being provided by such person. payments involving other payment settlement systems, such person will need to additionally offer RuPay is India’s indigenous card scheme created by the RuPay debit card, BHIM-UPI and BHIM-UPI QR Code National Payments Corporation of India. It was conceived to modes of payment for which he will need to make fulfill RBI’s vision to offer a domestic, open-loop, necessary arrangements with the payment service multilateral system which will allow all Indian banks and provider by 31 January 2020. financial institutions in India to participate in electronic payments. It is made in India, for every Indian to take them While the mandate technically applies from 1 [12] towards a “less cash” society . January 2020 onwards, the CBDT has granted Bharat Interface for Money (BHIM) is a payment app that concession till 31 January 2020 to allow sufficient lets a person make simple, easy and quick transactions time to specified persons to install and using UPI. One can make direct bank payments to anyone operationalize the facility for accepting payments on UPI using their UPI ID or scanning their QR with the through prescribed modes by 31 January 2020 BHIM app. One can also request money through the app failing which penalty of INR5,000 per day shall from a UPI ID[13]. apply from 1 February 2020 onwards.

Considering that payments through RuPay debit cards and BHIM-UPI will not involve any MDR on Circular clarifying the impact both payers and payees (even if their turnover is of prescribed electronic less than INR500m in preceding tax year), it is expected that most persons will prefer to use these modes of payments electronic modes of payments. Banks and payment system operators will need to carefully evaluate the impact of the Notification on their different revenue streams and operating models. The Circular clarifies that from 1 January 2020, the specified person must provide the facilities for accepting . payment through above referred prescribed electronic modes. Further, in view of a new provision in the PSSA, any charge including the MDR shall not be applicable on or after

1 January 2020 on payment made through the above referred prescribed electronic modes.

The Circular also clarifies that a penalty of INR5,000 per day is applicable in case of failure by specified person to comply with S.269SU. However, in order to allow sufficient time to the specified person to install and operationalize the facility for accepting payments through prescribed electronic modes, no penalty shall be levied if the specified person installs and operationalizes the facilities on or before 31 January 2020. However, if the specified person fails to do so, he shall be liable to pay a penalty of INR5,000 per day from 1 February 2020 for such failure.

[12] https://www.rupay.co.in/ [13] https://www.bhimupi.org.in/

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