It is possible that this experiment might see a rise in the Union government's cost incurred on tax concessions, without any increase in the tax base or coverage, says A K Bhattacharya.
Purists are likely to be aghast at the government's move to offer tax rebates to encourage transactions through credit and debit cards. Why, they would ask, should the government reward somebody for doing something that she should have done in any case in her own interest?
They would also point out that this perhaps exposes the government's inability to crack down on cash transactions that are unaccounted for, which, therefore, go out of the tax net and eventually generate black money. The more conservative among such purists could even wonder whether the proposed tax incentive looks similar to rewarding the tax inspector for collecting more taxes, the task that he is hired to do anyway.
Transactions through credit or debit cards should go up in the normal course of things, given the ease and convenience of these instruments. For online transactions, credit or debit cards are in any case the preferred mode of payment. Even otherwise, it is easier to carry these cards or plastic money instead of wads of currency notes to pay restaurant bills or for purchasing consumer durable items. If people still carry cash to settle their large bills, then there is something seriously wrong somewhere else and the government should try to fix that. It is not clear if only offering tax rebates on such transactions will help address those problems.
Remember that any cash payment above a certain amount necessarily requires the submission of the permanent account number, or PAN, so that the tax department can trace payments back to those who used cash to settle such high-value bills. Several questions arise. Is the government making full and effective use of its system to monitor and track high-value transactions in cash through PAN? If so, why should those who pay in cash, after furnishing the PAN, be discriminated against for tax purposes? And what is the guarantee that the tax incentive alone can encourage greater use of credit and debit cards?
India has at present over 21 million credit cards and 564 million debit cards. Credit card transactions mostly take place at points of sale and were estimated at around Rs 18,000 crore last April. For debit cards, the bulk of the transactions take place, expectedly, through automated teller machines or ATMs.
The total transactions through debit cards in April stood at a little over Rs 2 lakh crore. There is no doubt that the use of plastic money can be more widespread and the huge potential remains largely untapped. There are good reasons for that.
One, transactions through plastic money often attract a small two to three per cent surcharge because the merchant does not want to bear the burden of the charges the banks levy on him for facilitating the transaction. Even though small, the surcharge often acts as a barrier to increased use of credit or debit cards.
The problem of surcharges is not restricted only to petrol stations or online sale of railway tickets. A large number of merchants in the consumer durables and jewellery sectors, in particular, follow the practice of levying such surcharges. Removal of the surcharge alone can hugely promote the use of plastic money in these sectors and the proposed tax rebates then may well become redundant.
The verification process for payment through credit and debit cards has also become slightly complicated, though this is said to have ensured security and safety for those who are using their cards. But there is no denying that the process can appear to be cumbersome to many and is a factor that turns away many potential users of cards.
Moreover, there is often a marked reluctance among many well-established merchants to accept cards to settle payments, as the bulk of their transactions are in cash and, therefore, are not accounted for in their taxes. The proposed tax rebate may, thus, hardly be an incentive for them to encourage more transactions through cards.
There, however, may still be some merit in examining the tax rebate proposal. Like a company offers bonuses or higher commission to its employees for selling more goods, the government, too, can offer tax rebates to those who route more of their transactions through credit and debit cards. Who knows, this might work.
There is yet another argument in favour of such incentives. In tax matters, the end often justifies the means. If the incentives so proposed help the government bring more transactions under the tax net or help reduce, if not eliminate, black money, then the minor aberration in offering the tax concessions should be seen as a legitimate attempt to improve economic administration and overall governance.
The problem, however, with such incentives, is that once they are introduced, they are very difficult to remove and become a liability for future governments. Also, such selective exemptions do lead to distortions and even diversions that are always avoidable. In any case, tax incentives alone will not help in promoting the use of credit and debit cards unless the surcharges on such transactions and other hurdles are removed.
There is yet another danger. If the proposed tax rebate fails to attract new merchants to switch over to transactions through plastic money, it is possible that this experiment might see a rise in the Union government's cost incurred on tax concessions, without any increase in the tax base or coverage. That danger needs to be avoided at all costs.