Plastic Payments

The Finance Ministry’s proposal to incentivise the use of electronic payments by providing tax breaks to establishments that facilitate electronic card payments, as well as income tax breaks to those who use them, is the first serious effort to tackle the predominance of cash in the Indian economy. One hopes that the proposals, contained in a draft paper put up for discussion and comment by the ministry, will become policy. Finance Minister Arun Jaitley deserves to be congratulated for actually following through on his Budget promise to crack down on black money by promoting the use of an alternative payment system that leaves an electronic trail. The draft proposals, however, concentrate on tackling two key areas of resistance to the adoption of card payments by both merchants and consumers. The first is the higher cost of electronic transactions, where the fees charged by the payment gateway provider adds to the transaction costs. This can be a major disincentive, particularly in low value retail transactions. Merchants tend to pass this cost on to users, which ends up further incentivising cash payments. This is proposed to be tackled by offering a tax rebate to merchant establishments, that could get a tax rebate if, say, at least half the value of their transactions is through electronic means. Alternatively, it is proposed to give a 1-2 per cent cut in value added tax for all electronic transactions.

The bigger point of resistance is the reluctance, on the part of both vendors and customers, to leave a potential tax audit trail by going electronic. This the Centre hopes to tackle by giving an income tax rebate to those who use electronic payments for a certain percentage of their dealings, although the specifics of the rebate or the threshold haven’t been mentioned. At the corporate level, electronic payments have already become the norm, since RTGS (real time gross settlement) for high-value transactions are now at over 80 per cent of all electronic plus cheque transactions. At the individual level though, while electronic transfers like NEFT, ECS, etc, are rising, their share in total transactions by value was only 6 per cent in 2014-15. Debit cards are still overwhelmingly being used to withdraw cash from ATMs, accounting for 95 per cent of debit card transactions by value. This proportion has not changed in the last three years, pointing to the need for incentivising plastic.

The proposal to waive or reduce the convenience fee/service charge/surcharge levied by government entities on card payments is a good first step. Going forward, alternative payment systems need policy support if they are to become viable. Enabling a single ‘know your customer’ norm like Aadhaar will reduce the cost to banks and payment companies of enrolling customers. Rules covering prepaid instruments, electronic wallets and other alternative payment systems also need to be tailored keeping end-users in mind, to ease transactions and encourage use.