India proposes tax rebates for e-payments to discourage use of cash

India proposes tax rebates for e-payments to discourage use of cash

The Indian Government has put forward proposals to reduce the tax burden on electronic payments in an effort to reduce the use of cash and bring more people into the formal economy.

The draft proposals include a raft of measures to discourage cash use, including a tax rebate for merchants who accept electronic transactions and the consumers who use them, the introduction of uniform interchange rates for plastic cards, a bank-wide mandate to roll out more eftpos terminals, a cut in charges levied by telcos for processing e-payments, and a hike in cash handling fees.

Finance Minister Arun Jaitley in his budget speech, commented: "One way to curb the flow of black money is to discourage transactions in cash. Now that a majority of Indians has or can have, a Rupay debit card. I therefore, proposes to introduce soon several measure that will incentivise credit or debit card transactions and disincentivise cash transaction".

The government is inviting feedback on the draft proposals, which are available for comment until 29 June.

Comments: (3)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 25 June, 2015, 16:13Be the first to give this comment the thumbs up 0 likes

If only they made it more frictionless to use cards, we wouldn't need to sacrifice taxpayer money... 

Why I Went From Card To COD

A Finextra member
A Finextra member 25 June, 2015, 17:20Be the first to give this comment the thumbs up 0 likes

Electronic transactions require ELECTRICIY, something that is not always available in India, even in the large cities. When the power fails, eCommerce stops. The only hedge agains power failure is cash.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 26 June, 2015, 12:25Be the first to give this comment the thumbs up 0 likes

@FinextraM:

In case you’re not aware, over 50% of ecommerce in India happens via mobile. This eliminates the need for grid electricity at the point of transaction. While mobile batteries need electricity to be recharged, everyone who can otherwise shop online has enough grid electricity for doing that from time to time. So, eCommerce does not stop when power fails. 

Even if we take offline commerce, many stores have power backup for billing and processing electronic payments, so lack of electricity plays little role in reduced use of electronic payments. 

Now, when it comes to friction, things are different, both instore and in ecommerce.

Many card-based electronic payments fail instore because many POS machines have stopped working after PIN became mandatory. So consumers go back to cash.

Ecommerce requires Internet connection at the point of transaction (at least as of now since I don't know of any hybrid architecture shopping apps yet). There are documented cases of patchy Internet connectivity in the middle of Silicon Valley. But the number of steps required to complete an ecommerce transaction in USA are far fewer than in India (e.g. no need for VbV or OTP in USA unlike India). So, more transactions go thru' fine in USA even when Internet connection is patchy. That's not the case in India. Thanks in part to a banking regulator who believes in throwing the transaction baby with the fraud bathwater, online payments require many more steps in India. All these steps need to be orchestrated by the consumer’s device and Internet connection. Completing the transaction takes more time, within which chances of Internet connection breaking are high. As a result, confidence in electronic payments is shattered. So consumers go back to cash.

So, offline or online, friction is a greater cause for reduced use of electronic payments in India – not lack of electricity or card density or any of the other usual suspects.