The Government of India aims to build a cashless economy wherein all the transactions are done electronically and can be tracked. The government has taken various short and medium-term measures to accelerate the adoption of digital payments such as Prime Minister's Jan-Dhan Yojana, Aadhaar and mobile connectivity.
The committee on digital payments constituted by the Ministry of Finance in its recommendation report has specified that "Digital payments is to finance what invention of wheel was to transport."
Digital payments promise access to formal financial services and the benefits of e-commerce to the common man. In addition digital payments can improve Government's ability to curb tax leakages and funding of criminal activities. However, the recent initiative to demonetise high denomination paper currency has highlighted the gaps in our digital payments ecosystem. India needs innovation that would help overcome challenges associated with digital payments such as last mile connectivity, infrastructure and the cost of digital transactions.
Providing an infrastructure is important for accelerating the growth of digital payment, but what is most critical is to expand its acceptance amongst consumer and merchants.
Post demonetisation, the Government is likely to announce a string of measures in this year Finance Budget to increase acceptance of digital payments and to steer India on path to a cashless economy. We have outlined below few of such measures which may encourage a common man to walk on digital path.
Income-tax rebate for Individual tax payers
Following the measures adopted by South Korean Government to promote the growth of electronic payments in 1991, the Government of India may provide similar kind of tax rebate to individuals on account of electronic payments. The rebate can be capped at some maximum amount similar to rebate provided under Section 87A of IT Act. Given that the majority of the income tax payers fall within (0-10)% income tax bracket, introducing this cap would help to change the behaviour of many consumers.
Increased limit for Section 80TTA
The Government may increase the limit of Section 80 TTA exemption available for interest earned from Savings bank account in India for encouraging people to route the transactions through their savings bank accounts.
Tax incentives for traders
The Government may introduce lower tax rates, special exemptions for the small traders or businesses who accept payments through banking and digital means. Amendment of Section 44AD of IT Act for lower presumptive tax rate of 6 % versus 8% is a step in this direction. Under the existing provisions of section 44AD, in case of Individuals, HUF or partnership firms (other than LLP) carrying on any business and having a turnover of Rupees Two Crore or less, the profit is deemed to be 8% of the total turnover. In order to achieve the Government's mission of moving towards a less cash economy and to incentivise small traders / businesses to proactively accept payments by digital means, Government has decided to reduce the existing rate of deemed profit of 8% to 6% in respect of the amount of total turnover or gross receipts received through banking channel / digital means for the financial year 2016-17.
Tax disallowance for salary payment in cash
The Government can make it mandatory for all the enterprises including micro, small and medium firms to pay salaries electronically to all employees (including contract labour). Any deviation can lead to disallowance of part of such expenses for tax purposes.
Obligation to possess cash registers
The Government can mandate a wide group of businesses to use cash registers or related fiscal devices in order to record every individual transaction, regardless of the means of payment. The process of introducing cash registers, often described as the process of fiscalisation, is intended to provide a mechanism for the tax administration to supervise the records in cash turnover and to monitor and detect non-compliance.
In many countries, if the goods are purchased through a credit or a debit card, then the Government offers a reduction of certain percentage from the Value Added Tax to the consumer and the same abatement/ rebate is also further passed on to the merchants. The Government may provide such regime of a tax benefit replacing the current system where the banks are charging a surcharge and service fees. The Government should club this with its already planned move to offer discounts for payments done through credit and debit cards for general public utilities life fuel, toll payments, railway transports etc.
Given the current campaign to move India towards a cash less and digital economy along with the existing problems in the system in relation to cyber security and limited reach of the internet networks, the Government will need to come up with pretty lucrative schemes for encouraging every individual to contribute to this dream of digital India and also provide the relevant infrastructure for the same.
(Views expressed are personal)