The Indian government has decided to waive the service tax on payments of up to Rs 2000 in a single transaction made by credit cards, debit cards, charge cards or any other payment cards as another attempt to promote a ‘cashless economy’ amidst the existing cash crunch and liquidity crises.
Exemption of Service Tax for Payments Less than Rs 2000
The government has decided to “exempt services by an acquiring bank to any person in relation to the settlement of an amount up to Rs 2,000 in a single transaction transacted through credit, debit card or other payment card service.
The news has been received with mixed reactions from the restaurant owners, as there exists ambiguity regarding the conditions of the tax exemption. There is no clarity on whether the tax exemption is limited to merchants or customers as well. When customers make digital transactions, the merchant/service is charged a certain Merchant Discount Rate (MDR) by the bank issuing the credit/debit cards.
There are two scenarios that are likely to occur, one being the tax exemption being limited to the charges levied by the banks on the card POS (Point of Sale) transactions to the merchants and the intra-bank charges. If the tax exemption is on the transaction charge by the merchant, then only 0.2% would be waived off. This would neither provide the customers an incentive to spend more nor help the restaurants much.
The second scenario is the service tax exemption being available on all transactions under Rs 2000. The exemption of the service tax, which is 5.6% in restaurants would be a relief to customers and also boost the overall spending capacity. For most restaurants, the average price per customer (APC) for two people ranges from Rs 700 to 2000. The service tax waive off is likely to have a positive impact on the restaurant business.
If this is indeed the case, then the requests for split billing are expected to increase in restaurants to get a tax exemption on the bill more in value than Rs 2000!