With increasing digitisation of payments, payment aggregators and fintech platforms have become critical intermediaries between customers and merchants. At the same time, enforcement actions by the Directorate General of GST Intelligence (DGGI) have also expanded in scope, often attempting to extend liability beyond the actual supplier.
A recurring issue in investigations is whether a payment aggregator can be held liable for GST evasion committed by a merchant, particularly where the merchant’s GST registration was already cancelled and the aggregator allegedly failed to verify the GST status at the time of onboarding.
Role of a Payment Aggregator under GST
A payment aggregator merely facilitates settlement of consideration between the customer and the merchant. It does not supply goods or services, does not issue tax invoices for the underlying transaction, and does not collect GST as a statutory levy.
Under Section 9 of the CGST Act, tax liability arises only on the person making taxable supplies. The scheme of GST does not envisage shifting of tax liability to intermediaries merely because they are connected with the transaction.
The Delhi High Court, in MakeMyTrip (India) Pvt. Ltd. v. Union of India [2016 (44) STR 481 (Del.)], clearly held that intermediaries facilitating transactions cannot be fastened with tax liability unless the statute expressly creates such liability. This principle squarely applies to payment aggregators under GST.
Is There Any Legal Obligation to Verify GST Registration?
A common allegation in DGGI proceedings is that the payment aggregator failed to verify the GST registration status of the merchant.
However, it is important to note that neither the CGST Act nor the CGST Rules impose any statutory obligation on payment aggregators to verify GST registration at the time of onboarding. The obligation to obtain, maintain, and renew GST registration rests entirely with the taxable person.
The Supreme Court, in CCE v. Hari Chand Shri Gopal [2010 (260) ELT 3 (SC)], held that conditions or obligations cannot be introduced by implication where the statute itself does not prescribe them. Therefore, absence of GST verification cannot be treated as a violation of GST law.
Attempt to Invoke “Aiding and Abetting” Provisions
In the absence of a direct tax liability, DGGI often seeks to invoke Section 122(1A) of the CGST Act, alleging that the payment aggregator aided or abetted tax evasion by the merchant.
It is settled law that abetment requires mens rea, i.e., conscious knowledge and intentional participation.
The Supreme Court in Union of India v. Rajasthan Spinning & Weaving Mills [2009 (238) ELT 3 (SC)] held that penalty provisions, being penal in nature, require proof of deliberate intent and cannot be invoked for mere negligence or omission.
Similarly, the Delhi High Court in Verma Industrial Ltd. v. CCE [2007 (217) ELT 513 (Del.)] observed that abetment must involve conscious and intentional assistance; mere inaction or procedural lapse does not constitute abetment.
Thus, mere failure to verify GST registration, without proof of knowledge or intent, cannot automatically attract Section 122(1A).
Negligence Is Not the Same as Intentional Facilitation
Even assuming that GST registration status was not checked, such omission would at best amount to negligence.
In Hindustan Steel Ltd. v. State of Orissa [1970 (25) STC 211 (SC)], the Supreme Court famously held that penalty should not ordinarily be imposed unless the conduct is deliberate or in conscious disregard of law.
This principle has consistently been followed in indirect tax jurisprudence and applies with equal force to GST penalty proceedings.
Can Tax and Interest Be Recovered from the Payment Aggregator?
Tax and interest are statutory liabilities that arise only from the charging provisions of the Act. A payment aggregator does not fall within these charging provisions.
The Supreme Court, in CCE v. Brindavan Beverages (P) Ltd. [2007 (213) ELT 487 (SC)], held that demands without clear statutory authority are unsustainable in law. Interest, being accessory to tax, cannot be demanded where tax itself is not payable.
Accordingly, recovery of tax and interest from a payment aggregator for supplies made by a merchant has no legal basis under GST.
No Retention of Benefit of Tax Evasion
Section 122(1A) also contemplates situations where a person “retains the benefit” of tax evasion. Processing fees or service charges earned by a payment aggregator in the normal course of business cannot be equated with retention of tax evaded by the merchant.
In CCE v. Chemphar Drugs & Liniments [1989 (40) ELT 276 (SC)], the Supreme Court held that intent or suppression cannot be presumed merely because duty was not paid by another person.
Liability Cannot Be Fixed on Hindsight
Often, proceedings against intermediaries are initiated based on subsequent discovery of fraud by the merchant. Liability under GST, however, cannot be imposed on the basis of hindsight.
The Supreme Court in Uniworth Textiles Ltd. v. CCE [2013 (288) ELT 161 (SC)] cautioned against imposing penal consequences based on assumptions or retrospective inference without evidence of intent.
Conclusion
A payment aggregator cannot be treated as a tax defaulter merely because it facilitated payment for a merchant who later turned out to be non-compliant. Failure to verify GST registration status does not, by itself, amount to aiding or abetting tax evasion, nor does it create tax or interest liability under the CGST Act.
Unless the department is able to establish conscious knowledge and intentional facilitation, proceedings against payment aggregators are unlikely to withstand judicial scrutiny.
As GST enforcement evolves, it is essential that liability remains confined to the statutory framework and settled legal principles, rather than being expanded through assumptions or administrative overreach.
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