Income Tax Department Uses Benami Law to Probe UPI Transactions via Payment Gateways

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

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• 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

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