Photo: Hemant Mishra/Mint
Photo: Hemant Mishra/Mint

Govt proposes tax breaks for electronic transactions

Service charge waiver on card payment and rationalization of mobile banking charges are also on the cards

New Delhi: Tax benefits, lower transaction fees for electronic payments and a nominal charge on high-value cash transactions are among likely steps that India plans to implement to become a cashless economy.

The government on Monday released draft proposals to encourage electronic transactions, which are expected to curb generation and circulation of black money.

The draft proposes a mix of steps to increase debit and credit card usage, mobile payments and other forms of electronic transactions.

It recommends tax breaks for consumers and merchants for higher usage of electronic transactions and waiver of service charges or convenience fees on card payments at utility providers, petrol pumps and railway ticket bookings to encourage more electronic transactions. It has also suggested mandatory electronic payments for high-value transactions above a certain threshold (an indicative amount of 1 lakh) and a small cash-handling fee above a certain limit. It has also recommended that utility providers give small discounts to consumers in case the bills are being paid electronically.

The draft also suggests asking banks that issue credit and debit cards to deploy point-of-sale terminals in the proportion of the card issuances. It also proposes rationalization of charges levied by telecom companies on mobile payments. At present, telecom companies charge 1.50 per transaction for mobile banking and payments. It also proposes a time-bound grievance redressal mechanism in case of fraudulent transactions.

Currently, banks have to report the aggregate amount of all credit card payments made in a year to the income tax department as one transaction, if the amount is more than 2 lakh. To facilitate high-value transactions, the ceiling could be increased to 5 lakh or more, the draft said.

Finance minister Arun Jaitley announced in the 2015-16 budget that the government will look at ways to incentivize electronic transactions. The ministry subsequently set up a committee of officials from government, banks, Reserve Bank of India, service providers and payment gateways to look into this.

By encouraging electronic transactions, the government hopes to reduce tax avoidance and counterfeit money in the economy as all electronic transactions will be well-documented.

“The goal of the proposed policy is to provide the necessary incentives to use e-transactions to replace the use of cash— either in government transactions, or in regular commerce over a period of time through policy intervention," the government said.

The draft, put up on www.mygov.nic.in, is open for public feedback till 29 June.

To be sure, it may not be easy to implement some of the suggestions, which will require wider participation from other government departments and state departments.

For instance, the draft proposes that “tax benefits could be provided to merchants for accepting electronic payments, e.g. an appropriate tax rebate can be extended to a merchant if at least, say, 50% value of the transactions is through electronic means. Alternatively, 1-2% reduction in value-added tax could be considered on all electronic transactions by the merchants".

However, it is unlikely that all state governments will agree on this.

The draft suggests benefits in terms of income tax rebates for consumers for paying a certain proportion of their expenditure through electronic means.

“High-value cash transactions are a leakage from a tax point of view as well as for the banking system. So, the steps proposed in the draft are positive," said Ananda Bhoumik, senior director at India Ratings.

“However, these are only short-term measures and the shift will depend on the lifestyle to a certain extent. While the younger generation is very comfortable with card usage, the challenge will be to move the older generation away from cash," he said.

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