Though concerns of mis-selling need to be addressed, migrating from cash- to card-based transactions will curtail tax avoidance and thus rein in the black economy
Unearthing black money was one of the election promises of the NDA government, which recently introduced the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. There are severe consequences such as heavy penalty and the provision of imprisonment for concealment and/or not disclosing of overseas assets. At the local front, the government is trying hard to attack black money. The amended tax return forms for FY15 require reporting of all bank accounts, passport number, etc, and the scope of disclosing overseas assets has been enlarged. Even tax laws contain provisions such as disincentive/prohibition of payment in cash, tax withholding on purchase of property over R50 lakh, collection of tax on sale of gold bullion/jewellery in cash (beyond a threshold), disclosure of PAN, etc. While some of these provisions have been there for quite some time, they have not been proved to be effective. The government is considering how to squeeze the areas where the possibilities of generating/spending black money lie. One of the things to curb the same has been promoting increased use of plastic money, or electronic transactions.
The government has placed draft proposals for facilitating electronic transactions on the portal mygov.in for public opinion. These aim to incentivise electronic transactions by offering tax benefits to merchants and consumers. In e-transactions, the customer authorises the transfer of money through electronic means, and funds directly flow from one account to another. These accounts could be held in banks or with prepaid instrument providers. The transfers could be done through debit/credit cards, mobile wallets, mobile apps, net banking, Electronic Clearing Service, National Electronic Fund Transfer, Immediate Payment Service, etc.
The objective of the proposed policy is replacing the use of cash so as to build a transaction history which will enable improved credit access and financial inclusion, reduce the costs of managing cash in the economy, reduce tax avoidance, improve the ease of conducting transactions and keep a check on counterfeit money.
To achieve this goal, the proposed measures include removing fees and charges on e-transactions, and offering tax benefits to merchants for accepting electronic payments—for instance, an appropriate tax rebate if a minimum percentage (say, 50%) of transaction value is electronically. The measures also include 1-2% reduction in VAT, income tax rebates to consumers for paying a certain proportion of their expenditure through e-transactions, levying a cash handling charge on cash transactions greater than a specified level, settling higher value transactions (say, R1 lakh) only through electronic means, rationalising inter-change fee on debit/credit card transactions, etc.
Other steps for promoting wider adoption of e-transactions are increasing the ceiling of reporting of the aggregate of all payments on credit cards from R2 lakh to R5 lakh, reducing the Merchant Discount Rate on debit card transactions, adopting e-payment gateway ‘PayGov India’ for collection of revenue, fees and penalties, and improving broadband connectivity to widen the scale of mobile-based payments. Further, there is a need for mandating banks issuing credit/debit cards to deploy PoS (Point of Sale) terminals in a prescribed ratio to the number of cards, since the number of PoS terminals as a percentage of the number of credit/debit cards is very low as of now.
The policy is a first step in moving towards a cashless economy. It is a small beginning but has the potential of leaving a major impact on the economy. It proposes to offer tax benefits to the people so that they start getting comfortable and eventually habitual to the electronic mode. If implemented with the right mix of policy, supporting infrastructure and technology, and quick redressal of complaints for fraudulent transactions, this will increase the confidence of people to use plastic money.
The author is leader, Personal Tax, PwC India. Views are personal
The stated objective of the draft report on electronic transactions is to reduce cash usage, lower the level of counterfeit notes and enable convenience. Migrating cash payments to the electronic form is a good idea as it brings in convenience if one is able to carry out transactions without using currency. Another objective is to curtail tax avoidance or rein in black money. There is also the fear of mis-selling cards to people, especially the low-income groups levels.
Individuals will benefit from the use of cards if all costs—hidden and overt—are waived off. This starts from the banks, which today force account holders to pay for a debit card every year. Similarly, electronic transfers through net banking invite a bank charge, which has to be waived off to be attractive. Banks are always on the lookout for charging customers for everything and often the SMS service is billed even when not requested for. This, combined with the removal of charges by merchants, will open the door for seamlessly using non-cash modes for transactions. In fact, the boom in e-commerce is predicated on the use of non-cash for payments.
Banks have been competing with one another for issuing credit cards. It is not uncommon to have a bank agent make one sign up for a card in a supermarket. The joining fee and first-year charges are waived off and the customer often is not aware that there would be a running charge second year onwards, which could range from R750-2,000 per annum depending on the bank and the kind of card. This can promote mis-selling to an extent with the agent enticing the prospective customer with a free credit card.
The issue here is that the use of credit cards, when not backed by a direct debit, runs the risk of paying a very high interest rate on the outstanding amount. In fact, banks quite smartly ask for payment for only a proportion of the amount on the due date and charge this rate to the customer. It does not register that the card rate works out close to 30% per annum!
Thus, we need to tread carefully on this kind of migration and ensure transparency so that customers are aware of the pitfalls. Banks too would have to get their returns through merchants, interest charges and fees, and hence cannot lose in net terms to get on board this scheme. The charges for using ATMs have been increased with lower number of free usages. Against this background, are they willing to forego any income here?
On the level of avoidance of taxation, the move to force transactions beyond a limit, i.e. R1 lakh, to the electronic form may not work. Today, cash transactions in large quantities are in real estate, jewellery, forex and ‘dabba trading’. In real estate, there are fixed proportions that are paid in cash and the levels vary across locations. This being the case, as long as our tax or stamp duty rates are high, there will be an incentive to understate the value of transaction. For jewellery too, often buyers do not want to leave an audit trail, and as the market is largely unorganised, most transactions are in cash where one can also dodge paying the requisite taxes. A lot of forex is purchased in cash to avoid paying tax, and unless we rationalise this structure of taxes, the relative cost-benefit analysis is skewed against identification. ‘Dabba trade’, which is still prevalent in the markets especially commodities or even the equity derivatives, is unorganised but is run on fixed rules and on cash basis to dodge the taxman and exchange regulation.
The crux is that cash payments would never be the preferred option in most cases, provided the tax system was reasonable. The present scheme of thinking is in the right direction, but we need to address the issue of mis-selling, lower cost of transaction and provide more access points.
While the move to enhance convenience is well-taken, we need to ensure that there are checks along the way as we move to a new system; someone—merchant, bank or customer—has to pay for it. If this cannot be identified, then we could be missing something. It is a zero-sum game and someone has to give in.
The author is chief economist, CARE Ratings. Views are personal