AAR rules on GST taxability of interchange fee, application rejected for not falling under GST Act

The Authority for Advance Ruling (AAR) held that the application seeking clarification on the taxability of the interchange fee under GST was not maintainable as it did not fall within the purview of the GST Act. The AAR concluded that the applicant was neither a supplier nor a recipient in the transaction and that the questions raised did not relate to the supply of goods or services. Therefore, the application for advance ruling was rejected.

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Issues Involved:
1. Whether the portion of the Merchant Discount Rate received by the issuing Bank as 'Interchange Fee' is liable to tax under the Goods and Service TaxRs.
2. Why different practice prevails by the Network in the industryRs.

Issue-wise Detailed Analysis:

Issue 1: Taxability of Interchange Fee under GST

The applicant, The Mobile Wallet Pvt. Ltd., sought an advance ruling on whether the portion of the Merchant Discount Rate (MDR) received by the issuing bank as 'Interchange Fee' is liable to tax under the Goods and Services Tax (GST). The applicant explained the roles of various parties involved in a card transaction, including the cardholder, issuing bank, network, merchant establishment, acquiring bank, and business correspondent. The applicant argued that the interchange fee is part of a composite supply involving multiple parties and should not be taxed separately to avoid double taxation and disruption of the seamless flow of credit.

The applicant provided a detailed explanation of the transaction flow and the GST implications at each stage, highlighting that the acquiring bank charges GST on the full MDR, and the issuing bank also pays GST on the interchange fee under the reverse charge mechanism. This results in double taxation as the issuing bank's GST payment does not allow the acquiring bank to claim input tax credit.

The applicant contended that the interchange fee should be considered part of the composite supply provided by the acquiring bank to the merchant establishment, and thus should not be taxed separately.

Issue 2: Different Practices by Networks

The applicant highlighted that different networks (MasterCard, Visa, and Rupay) follow different practices regarding the interchange fee and GST. While MasterCard and Visa do not provide GST details in their settlement files, Rupay includes GST information, allowing the acquiring bank to claim input tax credit. This discrepancy results in different GST treatment and financial outcomes for transactions processed through different networks.

Observations and Ruling:

The Authority for Advance Ruling (AAR) observed that the questions raised by the applicant do not pertain to the matters specified in Section 97(2) of the CGST Act. Specifically, the applicant is neither a supplier nor a recipient in the context of the transaction in question, and the questions do not relate to the supply of goods or services undertaken or proposed to be undertaken by the applicant.

The AAR concluded that the application is not maintainable under the provisions of the GST Act. Consequently, the application for advance ruling was rejected.

Order:

The application for advance ruling in Form GST ARA-01, registered as ARA NO. 87 dated 16/10/2018, is rejected as being not maintainable.

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