Nearly a month after the demonetization of Rs 1000 and Rs 500 notes ended, the committee of chief ministers on digital payments has submitted its report to NITI Aayog. The panel, headed by Andhra Pradesh chief minister Chandrababu Naidu, recommended measures such as tax incentives for adopting digital payments, promote payments via Aadhaar and introducing a tax on cash transactions.

Note that many of these measures have already been recommended by the Watal Committee on digital payments and this panel seems pointless at the moment unless it lays out more concrete steps to push digital payments in states.

The report, submitted last week, also lists which branch of government or ministry will have to take action on the recommendations. Interestingly, for some of the measures relating to the Unified Payments Interface (UPI) and merchant discount rate (MDR), the panel has directed the National Payments Corporation of India (NPCI) to take action. It’s worth remembering the the NPCI is not a government entity and that the UPI is owned and operated by the NPCI, which is owned 100% by banks.

Changes in taxation

– Relief in prospective taxes for encouraging merchants to accept digital payments and no retrospective taxation to merchants doing digital transactions. To this effect, the Central Board of Direct Taxes (CBDT) said small businesses and traders with a turnover less than Rs 2 crore will now get tax benefits if they adopt digital means of payments. The CBDT considers 8% of annual turnover as profit for such businesses and is taxed on the profit accordingly. The CBDT has now reduced the existing rate which is considered as profit to 6% of the amount of total turnover if the payments are done through digital payments and banking channels. 

–  Tax incentives to be extended to Micro ATMs, Biometric Sensors etc and domestic production to be encouraged.

– Tax refund for consumers using digital payment up to a certain proportion of annual income. Action to be taken by CBDT, department of revenue, finance ministry.

MediaNama’s take: Note that back in 2015, the finance ministry was considering income tax rebates for consumers for paying a certain proportion of their expenditure through electronic means. As such, this is a great move to push for digital payments but the ministry has still been sitting on this measure since 2015. Speedier implementation is needed.

– To curb the use of cash for large transactions the CBDT will levying a banking cash transaction Tax (BCTT) on transactions of Rs 50,000 and above. It also considered a cap on a maximum allowable limit of cash in all types of large ticket size transactions (Action to be taken by finance ministry and RBI). The budget may have an announcement which would look bringing down threshold required for quoting the PAN card to Rs 30,000 from the existing Rs 50,000.

Aadhaar related recommendations

– Aadhaar to be made primary ID for KYC. The panel added that Section 57 of Aadhaar Act can be applied for enforcement.

– The panel also said that the Aadhaar Enabled Payments System (AEPS) should be not be charged an MDR (interbank exchange fee charged to merchants). The action should be taken by the Reserve Bank of India (RBI) and the NPCI.

–  All payment banks and business correspondents (BCs) should be made interoperable through AEPS.

– Post offices should be provided with infrastructure with Aadhaar-enabled micro-ATMs.

Infrastructure for digital payments

– Contactless payments to be promoted for traveling in buses and suburban trains in metro cities. Recently, Axis Bank said it would be launching smart cards for commuters on the Bengaluru Metropolitan Transport Corporation  (BMTC) buses and Kochi Metro Rail

– UPI apps should contain a common interoperable UPI QR Code. Banks should encourage the common QR Code at a merchant’s location.

MediaNama’s take: QR codes have shown great success as demonstrated by Paytm and it is a great idea to bring an interoperable QR code on the UPI. But it needs to be pointed out that there are a number of closed loop QR codes from card networks and it is a hassle at the moment. A unified QR code solution should solve a lot of problems for merchants.

– The panel wanted the creation of a fund from savings generated through cash-less transactions for incentivising acquiring bank acceptance infrastructure creation in semi-urban and rural areas. In October, the RBI said it would be setting up an Acceptance Development Fund (ADF) to boost electronic payments and expand card acceptance network in India.

MediaNama’s take: We have pointed out that currently there is no parity between the way the MDR is split between the issuing and acquiring banks in card payments. This acts as a huge deterrent for banks who have not have their own card business. While the ADF is welcome to help set up payments infrastructure, the split between the banks needs to be more equitable to boost digital payments more organically.

–  Lower or zero MDR for all digital payments to Government entities.

– Rural and Urban Cooperative Banks should be on-boarded to Digital Transactions mode immediately.

Download: Report