The Goods and Services Tax Council’s proposal to offer a 2% discount for electronic transactions, likely to be discussed during its next meeting, will need to be implemented sensibly so as not to add to businesses’ compliance burden, according to tax consultants.
“If it has to be operationalised, it will be done as a discount or a rebate, which is given for digital transactions,” a tax consultant said on the condition of anonymity, adding that the compliance burden for firms may go up on this account.
“Most probably, what the government will do is to come out with a notification which says that if there is a digital transaction, then after the GST rate, one more line item called digital discount or digital incentive is added, which is subtracted from the GST rate. But this would also mean that each vendor will have to keep two sets of accounts, one digital and another non-digital,” he pointed out.
“Incentivising digital transactions by providing a 2% rebate would lead to a significant upsurge in consumers opting for digital payments,” said M.S. Mani, partner, GST, Deloitte India. “However, this will require necessary changes in the GST return processes as this would effectively translate to a lower GST rate for both the buyer and the seller.”
The ₹100 cap
The proposed discount would be capped at ₹100 per transaction, thus making all retail purchases up to ₹5,000 eligible for the discount. This could result in a revenue shortfall of more than ₹25,000 crore a year, but would spur cashless payments, the government reckons. This digital discount, if implemented, would be applicable on all business to consumer (B2C) transactions on items with a tax rate of 3% or more, according to official documents reviewed by The Hindu. One option to implement the discount would be to amend the existing tax rates to include the discounted rates, according to indirect tax consultants.
However, they added that this was the least likely option due to the operational difficulties it would pose, since the GST Council is at present only authorised to implement the tax rates of 0.25%, 3%, 5%, 12%, 18%, and 28%. “It is unlikely that they will implement a change in the rates themselves,” another tax consultant said, requesting anonymity as the discount was still only a proposal.
“Instead, another way they could do it is for the electronic payment channels, such as the banks behind the debit or credit cards, to refund the 2% amount to the customer once the transaction is done at the normal tax rate. It is unlikely that they will make businesses keep two separate books of account — one electronic and another cash — as that would be a big burden.”
Officials in the Finance Ministry said the proposal would come up for discussion in the next GST Council meeting, set to take place in the first week of January.
“This was on the Council’s agenda in its last meeting at Guwahati earlier this month and might be taken up during the next meeting,” according to a senior Finance Ministry official.
“There have been reports that more transactions are being done in cash to evade GST compliance. But now we have reduced the compliance burden and this move will also make digital payments cheaper, so [cash payments] should end.”
“The majority of payments are for ₹5,000 or less, so the ₹100 limit will mean the discount will apply to all these transactions,” the official added.
“To incentivise digital transactions, it is proposed to provide a concession of 2% in GST rate on B2C supplies, for which payment is made through digital mode [1% each from applicable CGST and SGST rates, if the applicable GST rate is 3% or more] subject to a ceiling of ₹100 per transaction,” the GST Council proposal states.
This concession would, however, not be available for small businesses registered under the Composition Scheme. Businesses registered under the scheme are eligible to pay tax at 1% for traders and manufacturers, and 5% for restaurants.
Taking an average transaction value of ₹1,800 per transaction, the revenue authorities expect the loss to the exchequer due to such a digital discount at ₹25,920 crore, if 40% of all digital transactions get the discount.
“The reduction in GST revenues on account of this would possibly be compensated [for] by the expansion of the tax net and improved compliance by existing taxpayers,” Mr. Mani said.