Transactions are the backbone of the economy. The buoyancy of transactions reflects the growth in the economy. Therefore, transactions are codified or recorded for trust to be maintained. Trust is ensured by the exchange of currency today, and going forward with digital currency.
The transition from gold to paper currency was done with the support of gold standard to maintain this trust factor. In moving towards digital transactions or to promote digital currencies usage has to be incentivized to build that trust through usage. Any change in consumer behaviour does not happen overnight, and to sustain it continuous incentives are needed. Companies and brands know that to change and sustain consumer behaviour in favour of their products it needs regular reminders through advertising and motivation through discounts. The government also needs to learn and accept that to drive digital transaction it is not a one-off exercise but that it will need sustained effort.
Every transaction is a decision, and there are several ways to complete that transaction. The consumers' decision can vary each time even within the digital alternatives or move back towards cash. Hence, it is important that digital transactions have low or zero cost to ensure that the consumer, merchant and the overall economy benefits from it.
To ensure this the rationale for building incentives for digital transactions into the GST framework cannot be overemphasised. Using the embedded consumer behaviour in Indians to get a bargain on every transaction incentives are the way to go.
Capturing the last mile transactions in a digital avatar also has enormous benefit from a monetary perspective. Particularly in knowing about the markets and geographical locations of buyers and sellers. Especially if the market is unorganised which most food markets are and the monetary target is food inflation. The loss of taxation is minimal but the future advantage to the exchequer and economy is enormous.
The objective is to waive off GST on the last mile transaction between the retailer and the consumer. Typically, the retailer margins range from 5 % to 20 % depending upon the product. These margins are highest on high value items and lowest on the essentials like milk, bread or other consumables. On a low margin if the digital transaction involves a cost, which is the case in debit and credit cards the merchant does not want to encourage it. This why card transactions are not encouraged by most grocery merchants due to cost of card based transactions. While digital wallets do not charge consumers for the transactions, they do levy a charge on merchants. These are both disincentives towards using digital payment systems.
The acceptability and sustainability of digital transactions depends upon the fact that it is done for every transaction however small. Only then will it replace cash. Digital transactions at last mile is not an end itself. Income or wealth created at the unorganised retail end is not captured by the tax system. While in a digital world it can be captured so incentivizing it with tax incentives for some time makes sense.
A waiver of GST on items of mass consumption where a rate of 5 % is envisaged can be waived off. Even on durables and other items a rate of 12 % to 18 % is envisaged this at the last mile will be levied on the retailers' margin. Therefore, on mass consumption items the tax loss due to waiver with the highest margin of 20 % will just be 1 %. But as an incentive it is a tangible one for both the consumer and merchant retailer.
Along with this waiver, policy can also be amended to ensure that the retailer by law be asked to keep a PoS machine at his end. This will ensure that the right to demand a digital transaction by the consumer can be carried out. PoS machines based on Rupay can also be given for free to drive its adoption. This also means that the debit card and credit card transaction fees on the last mile has to be very low or negligible to ensure that the incentive is secured by the consumer. This may also require that if needed the consumer should be given the choice of routing his transaction through the Rupay payment system.
By offering the consumer the option to route his plastic card payment through Rupay government will be able to offer him the lowest cost of transaction. This would mean that the system for all credit and debit card are inter-operable at the switch level.
To make this possible legislative changes may be required to the Payment and Settlement Act 2007, GST Bill and Consumer Bill. The last two bills are pending and new sections can be added without much effort. The Payment and Settlement Act will need amendment. A complete model with the impact on tax collection has been developed with the help of indirect tax experts, economists and international policy experts. The time to discuss and debate this change is now before the Parliament goes in for the budget session.
This is an excerpt from a paper written by : K Yatish Rajawat a policy analyst and digital strategist. Pradeep Udhas founder of KPMG (India) and Gopalan Ramachandran- Economist and consultant. With inputs from Sachin Menon, Executive Director indirect Taxation KPMG.
Guest Author
K Yatish Rajawat is a digital strategist and policy commentator based in New Delhi, he tweets @yatishrajawat.
Guest Author
Pradeep Udhas is a senior partner at KPMG US responsible for major alliances and global/US relationships with Tata Consultancy Services, Cognizant, Hinduja Group and Mahindra group
