Govt removes surcharge and service tax on digital payments to boost adoption
February, 27th 2016
In a bid to increase the adoption of digital payments in the country, the Union cabinet has decided to remove surcharge and service tax on digital payments, the government said in a release. Primarily, the move is done to curb the usage of cash and the government will announce a number of short term (within a year) and medium term (withing two years) measures which will be implemented by the government ministries, departments and organisations.
Currently, service charge is currently levied by payment gateways and paid to the government. The vendor using a payment gateway also pays a convenience charge. On credit cards, it is 1-2.5%, according to this Business Standard report.
“Promotion of payments through cards and digital means will be instrumental in reducing tax avoidance,” the government said in its release
The finance ministry had in July 2015 had considered tax rebates for card payments and at the time had suggested the rationalisation of the Merchant Discount Rate (MDR), which at present is 0.75% on Debit Card transactions of up to Rs 2,000 and 1% on all transactions above it. An MDR is an interchange fee which is paid to the bank that issued the credit card that was used in each transaction.
The ministry also mulled income tax rebates for consumers who pay a certain proportion of their expenditure and bills through electronic means. The government also proposed levying of a nominal cash handling charge on transactions greater than a specified level.
At the time, to enhance adoption of mobile banking, the finance ministry also said Unstructured Supplementary Service Data (USSD) charges could be examined and rationalized. Currently, the telecom companies are charging a USSD charge of Rs. 1.50 per transaction for mobile banking/payments.
The government’s moves for increasing digital adoption are welcome. The most significant changes would be the rationalization of the Merchant Discount Rate. Many small scale establishments and shops are reluctant to accept card payments because of the number of charges payment gateways and banks levy on them. The key for increasing digital payments in India will be merchant adoption.
As we’ve pointed out earlier, an Ernst and Young report said that the country has the lowest POS terminal penetration in the world. The report further adds that there are only 693 machines per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people.
RBI’s latest data shows that there are 12,69,871 POS terminals in the country. Compare that to 2,24,75,500 credit cards and 62,46,26,392 debit cards in circulation.
A good thumb rule for adoption would be to see if restaurants in Kolkata would start accepting card payments.