Tax audit in India

Modi's government plans cashless coup with tax incentives on electronic payments

India has unveiled plans to cut transaction costs for electronic payments, to spur retailers and consumers to use less cash, as part of Prime Minister NarendraModi's drive to pull more people into the formal economy and boost public revenue.

India is among the most cash-intensive economies in the world, with a cash-to-GDP ratio of 12 per cent, almost four times that of markets such as Brazil, Mexico and South Africa, global payments company MasterCard estimates.

Many small Indian businesses and consumers now prefer cash, to avoid high transaction costs of up to 3 percent on electronic payments, as well as to escape sales tax.

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

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 A.P. Hota, chief executive of RuPay's parent, the National Payment Corp of India (NPCIL).

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

Modi is also rolling out banking services for all households and shifting the payment of state subsidies into people's bank accounts, moves intended to deepen the financial system and deter fraud.

Finance Ministry officials said the central bank and telecom operators had already been consulted on the new plan.

"The scheme aims to make the life of consumers easier," said finance ministry spokesman D.S. 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 electronic payment of a proportion of their expenses, the draft said