Clarification on GST exemption for payment gateways likely

The State-Central Panel of GST Officials, also known as Fitment Committee has recommended that GST exemption under entry 34 of Notification No. 12/2017-CTR will apply to payment aggregators (PAs) for settlement services involving handling of money, but not for payment gateway (PG) functions. This clarification, pending official issuance through a circular by RBI, aims to resolve ambiguity about the tax treatment of fintech services provided by PAs.

Payment aggregators facilitate e-commerce transactions by connecting merchants with acquiring banks and handling customer funds before transferring them to merchants. The key question was whether PAs qualify as “acquiring banks” under the notification, which would make them eligible for exemptions on transactions up to Rs 2,000 conducted via credit, debit, or other payment cards. Inputs from the RBI confirm that PAs meet this definition for settlement functions.

However, a clear distinction has been drawn between PAs and PGs. As per RBI guidelines, PAs manage the receipt, pooling, and transfer of funds, while PGs only provide technological infrastructure for payment processing without handling money. The Fitment Committee has confirmed that only the settlement functions performed by PAs fall within the scope of the GST exemption. PG services, which do not involve fund handling, are excluded.

As per the fitment panel, this decision aligns with the Delhi High Court’s judgment in the Lotus Pay Solutions Pvt. Ltd. case, which recognized PAs as payment systems due to their role in managing customer funds. While the settlement services provided by PAs remain tax-exempt, the council aims to provide further clarity through an official circular to prevent misinterpretation.

Merchants and fintech operators now await the final circular, which will have significant implications for the operational and pricing strategies of businesses relying on these digital payment intermediaries.