The Hindu Business Line : Bankers seek lower service tax on credit cards

IF bankers' Budget wishes are fulfilled, their credit card customers may no longer scream at their bills. If not a waiver, at least a reduction in service tax is what a clutch of banks is seeking from the Finance Minister.

The service tax levy on credit cards is currently 10.2 per cent. Currently, there are about 13 million credit cards in the country. The usage has been growing at approximately 35 per cent a year.

One of the major factors impacting credit/debt card usage is taxation, which tends to add to the customer's expenditure. In fact, this prevented rural and semi-urban customers from joining the card network (including Kisan cards), bankers said. A tax reduction would, therefore, act as an incentive with benefits to the economy. Banks seeking this concession include both large public and private sector entities.

Revenue positive

Bankers said that a reduction or even a waiver would be revenue-positive. This implies that revenues lost on the withdrawal of the tax would be more than compensated with increased mopping up by other sectors. The Country Head for Retail Operations, Centurion Bank of Punjab, Mr Vivek Vig, said, "Electronic transactions leave a trail and therefore are far more transparent."

Currently, most of the transactions in the country are in cash. Cash transactions, unlike electronic ones, leave no trail. This leads to a lower tax collection. It is not the Centre alone that is losing revenues. Even States are losing revenues through sales tax delinquencies or transactions without bills. Moreover, electronic payment/receipt mechanisms tend to bring in greater discipline in public expenditure.

Mr Santanu Mukherjee, Country Manager (India), Visa International Asia-Pacific, said, "Electronic payment system for activities like tax collection and other administrative purposes may facilitate a more effective use of public funds, make Government transactions and accounts more transparent and easily traceable."

In fact, bankers have argued that electronic payments may completely alter the tax to gross domestic product (GDP) ratio in the country.

The Chairman and Managing Director of Indian Bank, Dr K. C. Chakrabarty, said, " As collections improve, so will the ratios." For the country as a whole, the tax to GDP ratio is barely 10 per cent. This implies that fiscal delinquency is still high, despite the progress made in tax collections over the last few years. China and Vietnam have better ratios nearing 20 per cent, while those of Europe are about 40 per cent.

Tax compliance

Bankers said that improved collections could also address the problems of fiscal correction in the country. Higher tax compliance could help bring down the large revenue/fiscal deficits at the Centre and State levels. Electronic payment mechanisms could completely reduce the black component of the economy. The parallel economy is estimated at half the size of the GDP.

On the flip side, more merchant establishments in the country would have to be wired into the card network for making any electronic payment successful in tier II cities. Visa, as part of its Area Development Programme (ADP), is already bringing tier II cities into its network. The ADP was first piloted in Vadodara in 2001. Since then, it has been rolled out in several small cities in the country.

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