Indian Government Plans Tax Incentives for Electronic Payments

The Indian government has unveiled plans to cut transaction costs for electronic payments (e-payments) to encourage retailers and consumers to use less cash, as part of prime minister Narendra Modi’s initiative to transfer more workers into the formal economy and boost public revenue.

India is among the most cash-intensive economies in the world, with a cash-to-gross domestic product (GDP) ratio of 12%, almost four times that of markets such as Brazil, Mexico and South Africa, according to estimates by MasterCard.

Many small Indian businesses and consumers prefer cash to avoid transaction costs of up to 3% on e-payments, as well as to escape sales tax.

In a draft proposal posted on the finance ministry website, the government recommended tax concessions to reduce the cost of credit, debit and online payments. The proposals will be implemented gradually after June 29.

Finance Ministry officials said the Reserve Bank of India (RBI) and telecom operators had been consulted on the plan. “The scheme aims to make the life of consumers easier,” said finance ministry spokesman DS Malik.

One proposal is to offer sales tax rebates of 1 to 2 percentage points to merchants who report at least half of their transactions through online payments. Consumers could get an income tax rebate for e-payment of a proportion of their expenses, the draft said.

If successful in increasing card payments, the new measures will be a boost for global and debit card companies MasterCard , Visa and American Express, as well as domestic rival RuPay and mobile payment banks.

“It is a big economic reform of the Modi government that will ease conducting business by consumers and merchants,” said AP Hota, chief executive (CEO) of RuPay’s parent, the National Payment Corp of India (NPCIL).

NPCIL, with 165m cards, expects a jump in business once transaction costs are lowered, including those on state-run Indian Railways and retail petrol pumps, he said.

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