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To boost usage of debit and credit cards for small value transactions, the government waived off service tax for transactions up to Rs 2,000Note that this exemption applies only to the Merchant Discount Rate (MDR) which banks levy on merchants and not on the whole Rs 2,000.

An MDR is an inter-bank exchange fee. Typically, merchants are charged around 2% per transaction through cards. There is an issuing bank which gives a debit card or credit card to customers and an acquiring bank which accepts the payment from the card. It is important to also understand that the service tax exemption will only apply to the acquiring bank, as indicated by this Central Board of Excise and Customs notification.

This might mean that banks will pass on the benefit of the service tax exemption to merchants and lower the MDR.

The government is now rapidly scaling its efforts to build a card acceptance infrastructure following the demonetization of Rs 500 and Rs 1000 notes. It has ordered banks to install 10 lakh POS terminals in the country by March 2017 to ease the woes of a cash crunch. Accordingly, to facilitate this, the government has also removed excise duty on the import of goods for the manufacturing of POS  machines.

According to latest figures from the Reserve Bank of India, the total number of POS terminals in India stands at over 14 lakh. The government added that nearly 6.5 lakh machines have been issued by public sector banks to merchants. Participation of other public sector banks in issuing POS terminals is important as we pointed out that there is a concentration of POS machines with State Bank of India, ICICI Bank, HDFC Bank, Axis Bank and Corporation Bank which account for 80.94% of machines in the country.

Government, through NABARD, will extend financial support to eligible banks for deployment of 2 POS devices each in 1 Lakh villages with population of less than 10,000.

Public sector banks were also advised that merchants should not be required to pay more than Rs 100 per month as monthly rental for POS machines, micro ATMs and mobile POS.

Encouragement of use of digital payments in government undertakings

-Central government departments and public sector undertakings have to ensure that the transaction fees and MDR associated with digital payments need to absorbed and should  not be passed on to consumers.

– Government Petroleum PSUs will offer a discount of 0.75% of the sale price to consumers on purchase of petrol and diesel if payment is made through digital means.

– Railways, through its sub urban railway network, shall provide a discount up to 0.5% to customers for monthly or seasonal tickets from January 1, 2017, if payment is made through digital means.

–  For the payment of toll at Toll Plazas on National Highways using RFID card/Fast Tags, a discount of 10% will be available to users in the year 2016-17.