The finance ministry is looking at a novel initiative to mop up more tax revenues without increasing tax rates: credit cards.
An internal group, set up by the ministry, is examining a successful initiative used by the South Korean government to increase tax collections by providing incentives to individuals and companies to use credit cards for making payments.
“The concept is still on the drawing board. The group has been asked to examine if the Korean concept can be implemented in India, more so since the penetration of plastic cards in India is very low,” said a finance ministry official who did not wish to be identified said.
Here’s how the Korean model worked. The government encouraged use of credit cards by providing fiscal incentives. For instance, consumers who made card transactions were made eligible for an income-tax deduction of up to $4,000 per year. Similarly, fiscal authorities organized monthly raffles that were publicized on national TV, which gave out prizes of up to $75,000 for each transaction exceeding $7.50.
Companies were also given discounts of up to 20% in their value-added tax and allowed deductions on corporate tax returns if they paid their expenses exceeding $35 through cards rather than cash.
The Korean model, introduced after the financial crisis of 1997, helped the Korean government increase its tax collections from $59 billion in 1999 to $76 billion in 2000. Since the use of cards can be monitored and tracked, tax collection as a percentage of the country’s GDP also increased from 14% in 1996 to 17% in 2000.
The Indian scenario is, however, quite different. According to the statistics for 2005-06 released by the Central Statistical Organization, the personal consumption expenditure in the country is of the order of Rs20 lakh crore of which over 90% is made using cash. Further just 3% of the expenditure is undertaken using cheques while a little over 1% was made using cards.
“People in India are so used to using cash that as much as 80% of the ATM transactions involve withdrawal of cash. There is a comfort level people have in making payments using cash rather than through cards,” he added.
Ministry officials, however, note that if government were to make payments by companies and government departments mandatory through cards, monitoring would become easier and faster.
“Since Visa and Mastercard are two of the main companies that deal with plastic cards, the government could have a data exchange system with them, which would allow the tax department to monitor the transactions made. However, we need to examine how the system can be introduced,” an official added.