IT benefit for card payments: Gamechanger?

An interesting news that broke out yesterday was that of the Union Govt. mulling over an idea that would offer IT benefit for card payments through credit and debit cards. While still only at a draft paper at this stage (and one that welcomes your inputs), one can’t help but speculate on the potential ramifications of this new law, which at least as far this author is concerned, is a potential gamechanger in more ways than one.

The reasoning behind this particular ‘offer’ if you will, is to clearly create an electronic trail of most, if not every financial transaction, which will result in greater tax compliance and unparalleled fiscal transparency. Contrary to popular belief, corruption (both individual and bureaucratic) cannot be completely solved by bludgeoning the alleged party into giving up their crooked ways, and/or base scare tactics, which while making for entertaining cinema, only manages to make the corruption even more nebulous, pushes it underground, and harder to eradicate. To remove corruption systematically, especially in a ridiculously complex economy and polity such as India, one requires a multi-pronged approach, chief among which is increasing transparency in every transaction, financial or otherwise. The above outlined scheme is clearly a step in the right direction. What sweetens the deal even more is the fact that merchants will also be encouraged (via tax benefits) to accept most of their transactions through plastic, ensuring greater tax compliance on their part as well. The cynics among us would point out that whilst this is a good idea in principle, the low debit and credit cards penetration prevents this from being very useful. Firstly, it is quite unlikely that this particular demographic has to pay income tax in the first place, as they are probably below the exemption limit. Secondly, PM Modi’s Jan Dhan Yojana is a clear solution to this particular issue. With constantly increasing Jan Dhan Yojana bank accounts and associated Rupay cards it is only a matter of time that a large fraction of the Indian populace shall possess some form of plastic. This would hopefully translate into electronic transactions becoming the de Jure form of monetary exchange in the Union. While the above outlined goals of transparency and tax compliance are seemingly sufficient in themselves,  they aren’t necessarily gamechangers. This author for one, is excited at the possibility of this being the foundation on which a fundamental overhaul of the tax code can be achieved.

Unlike other countries, India has a fairly low IT tax base as a percentage of population, and compliance is notoriously sketchy. Income tax has been a rather strong bugbear of the salaried class, who feel that their hard-earned money is taken away from them without any real tangible benefits offered in return. On top of income tax are indirect taxes such as sales tax and excise duty which forces people to exercise even greater fiscal prudence. From a mathematical perspective, it isn’t hard to imagine that if the tax base grows, the rates can theoretically come down (though whether the Govt. would actually do it is a different argument altogether). A bold move would be to abolish income tax altogether, and mark up the GST to a fairly high number, serving as a consumption tax. For those who are aware of what I am talking about, I am indeed referring to the fair tax. The fair tax has very little room for tax avoidance, provided most transactions are accounted for, and a substantially larger tax base, as it is agnostic to your income, and is dependent only on how much money you spend. This form of taxation also ensures that the average citizen has greater spending power (simply because now your gross and net income are essentially the same), which would mean more transactions, and overall healthy self-regulation of the economy. A constant criticism of high indirect taxes is the overall increased costs of a product which affects lower income groups the most. While this is indeed true in theory, the fair tax does address this by providing an untaxed amount called as prebate. Admittedly, the nature of this prebate will have to take into account various concerns, and is not too trivial; qualitatively, the idea of a higher consumption tax does not necessarily have to alienate the poor and marginalised.

As is quite obvious though, the success or failure of the fair tax in terms of revenue generation for the Govt. is dependent on a large enough consumption tax base, and near-perfect compliance, both of which are, quite honestly, in short supply as of now in India. Ensuring card-based transactions are the norm is one of the few ways that at least transparency can be achieved.  It must be pointed out that all is not perfect with the fair tax. There are some potential drawbacks, and the ramifications of a pure consumption tax are still somewhat unknown, making the fair tax unviable at this stage, for most countries, not just India. That being said, it is an excellent goal to work towards, and one that requires greater public discourse in the country. While even this author concedes that it is quite unlikely that a pure consumption tax will completely replace income tax, a mix of low IT rates and slightly elevated GST rates would be an excellent way to ensure greater spending power for citizens, a self-fueling economy, and a simplified tax code. The government’s idea of implementing financial transparency is a much-required foundation for such lofty goals, and hence requires strong support from the citizens.