Digital transactions to grow as cash usage attracts more compliance

Digital transactions to become cheaper and more merchants to accept electronic payments

It has been a prominent practice among shop owners. When customers ask to pay through their debit or credit card, the business owner asks for up to 3 per cent extra charge. Reason: Merchants accepting payment through cards are charged a fee (known as Merchant Discount Rate) on each transaction, and they pass it to the customer. Once the Parliament passes the Budget proposals, this practice will stop.

To promote digital transactions and make India a less cash economy, the finance minister has proposed multiple measures in her Budget speech. The prominent one that affects most individuals is doing away with the fee in card transactions. The card owner or the merchant won’t have to pay any charges. Banks and Reserve Bank of India absorb the MDR.

“The government has taken a slew of measures in the past, such as demonetisation, to curb cash and thereby target black money. But the change has not been as fast as it desires. The government is finding more ways to tackle the problem. Promoting digital payment is one among them,” says Amarpal Chadha, tax partner and India mobility leader, EY India. According to Chadha, the government’s intent is clear – digital is the way to go. Dealing in cash will have restrictions and higher compliances.

Tax on cash withdrawal over Rs 1 crore: If anyone makes withdrawal totalling Rs 1 crore or more in a year from a bank or post office, the financial institution will deduct a withholding tax of 2 per cent from the account. For this, the government will introduce Section 194N in the Income-Tax Act. “Over the years, the government has moved towards withholding tax, which helps to plug loopholes in the system,” says Divya Baweja, partner, Deloitte India. According to Baweja, when the bank or post office would deduct and deposit tax, the Form 26AS would get generated automatically. The Form 26As is a consolidated tax statement which has all tax-related information associated with a PAN. If the person is not a taxpayer, he will come in the tax net.

Tax experts say that this is similar to the Banking Cash Transaction Tax (BCTT) that was introduced in 2005. Under this, there was a 0.1 per cent on cash withdrawals of more than Rs 50,000 for individuals or Hindu Undivided Family, and Rs 1 lakh for others, in a single day from non-savings bank account maintained with a bank. It was later abolished in 2008. 

More merchants to offer digital payment: Besides easing the MDR, the government has also made it mandatory for larger businesses to offer low-cost digital payment options. For this, the finance minister has proposed to introduce a new section 269SU under which businesses that have sales turnover or gross receipts exceeding Rs 50 crore during the last financial year will need to accept payment through the electronic mode from November 1 onwards.

If businesses or professionals don't comply with this, the tax department will impose a penalty of Rs 5,000 every day until they are ready to accept payment digitally. The penalty will be introduced under a new section 27IDB. “The country will become a less cash economy only when merchants are willing to accept money through digital transactions. Increasingly, consumers are moving to digital payment for their e-commerce shopping or to get benefits from payments apps. The government has, therefore, made it mandatory for large businesses to accept payments through digital means,” says Suresh Surana, founder, RSM Astute Consulting Group.

A simple measure goes a long way: Over the years, the government has been taking steps to reduce cash transactions. Under various sections, the government has made it mandatory to use digital mode of payments. Cash in a property transfer, for example, is restricted to Rs 20,000. Under Section 269ST, no person can receive an amount of Rs 2 lakh or more from another in a day. Businesses are disallowed deductions if their capital expenditure is in cash beyond the specified limit. “But there was a problem. The government used to specify the payment mechanism that can be used for such transactions. The payments space in the country has evolved and there are newer ways a person can transact digitally. Every time the government wants to add a payment method, it needs to bring amendments to Income-Tax Act,” says Naveen Wadhwa, a chartered accountant with Taxmann.com.

Instead of making amendments every financial year in the Budget, the finance minister has proposed to amend all the Income-Tax (I-T) sections that deal with cash transaction. The government will add words “other electronic mode as may be prescribed”. By adding these few words, the government can now add new payment methods just by issuing a notification instead of going to the Parliament for approval. Wadhwa says that there have been instances where tax officers took objection to digital payments as they were not specified in the I-T Act. “Some officers don’t consider the spirit of the law. They prefer to stick to the wordings of the Act,” says Wadhwa.

Tax experts say that while the government has ensured that individuals use less cash and larger merchants offer digital payment options, it should also focus on cybersecurity. “Digital payment is more efficient, transparent and convenient but it is also vulnerable to cyber-attacks. Instances of cybercrime are on the rise. The government should also ensure that companies in the digital payments space have the required safeguards in place,” says Surana.