Context:
The Income Tax Department has issued notices to at least two payment gateway firms under Section 23 of the Benami Transactions (Prohibition) Act, 1988
- The notices demand disclosure of individuals linked to suspicious UPI IDs, recipients of payments, transaction dates, bank account details, and the actual flow of money
- Objective: To trace whether shell merchants are being used to route money for tax evasion or benami arrangements
What Is a Payment Gateway?
A payment gateway is a technology used by merchants to accept debit or credit card purchases from customers. The term includes not only the physical card-reading devices found in brick-and-mortar retail stores but also the payment processing portals found in online stores.
Brick-and-mortar payment gateways also have begun accepting phone-based payments using QR codes or Near Field Communication (NFC) technology.
Suspicious Transaction Patterns
- Certain PG-registered merchants may be fronts or proxies helping remitters book fake expenses
- Money is received via UPI, then returned in cash, making it hard to trace and opening the door to benami ownership and tax evasion
- Shell companies acting as merchants may also hold funds on behalf of undisclosed beneficiaries
Legal and Regulatory Basis
- Section 23 of the Benami Act empowers tax authorities to gather information even in the absence of an active investigation, with approval from an Additional or Joint Commissioner
- This differs from the I-T Act, where information collection is usually tied to an ongoing assessment
- Authorities may verify if recipient entities report the income in their tax returns; if not, it suggests a benami setup
Role of Payment Gateways and KYC Compliance
- PGs, regulated by the Reserve Bank of India (RBI), must carry out KYC before onboarding merchants
- Any KYC gaps or informal arrangements could increase regulatory scrutiny
- PGs may be asked to clarify if real operators differ from those named in official KYC records
Implications for Fintech and Compliance
- The probe signals rising scrutiny of digital payments infrastructure for money laundering and benami risk
- Firms may need to strengthen transaction monitoring systems and tighten merchant onboarding processes
- Ensuring clear documentation and transparent reporting will be critical to avoid legal exposure
