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Who does service tax waiver on online transactions below Rs2,000 apply to?


Mumbai: There appears to be some ambiguity in the announcement regarding the waiver of service tax on transactions below Rs2,000 as experts are of a mixed opinion over whether this is applicable only to merchants or to consumers as well.

“While online reports suggest the government is planning to waive service tax on debit and credit card transactions of up to Rs 2,000 done using debit/credit card in order to promote cashless transactions by way of an exemption notification, one needs to watch out for the exact wordings used in the notification,” said Mahesh Jaising, partner, BMR and Associates LLP, who pointed out two possible scenarios.

One, where the exemption being limited to the transaction charges levied by banks on the card point of sale (POS) transactions (to the merchants and intra bank charges).

This should result in lesser resistance by the merchant who, in addition to the charges, currently incurs a 15% service tax.

The second scenario is of the exemption being available to all services, where the transaction value is less than Rs2,000.

This seems to be a less likely scenario—as this could result in complications, likely misuse of splitting transactions.

“If this is the scenario, the 15% service tax would indeed be exempt. However, the service provider would need to reverse credit as the services could be exempt and taxable. The reversal could go up to 7% of the value of the services and there would be challenges of recovering the same,” said Jaising.

Service tax for services such as salons, restaurants and pre-paid phone connections varies from 4.5-15% and if this is being waived off for the consumer, it will positively impact spending.

“On an average, bills below Rs2,000 account for a fifth of the overall consumption pie where service taxes are applicable and this will be positive development and encourage spending,” said Anil Talreja, partner at consulting firm Deloitte Haskins and Sells.

However, if the service tax waiver is just for the merchant transaction, then the impact is marginal for merchants.

“When you swipe your card for say Rs100, Rs2 gets distributed among the acquiring bank, issuing banks and the payment network provider. The remaining Rs98 goes to the merchant. Out of Rs2, 15% is service tax. So effectively, 0.3 paise is the saving for the merchant,” said Pratik Jain, leader-indirect tax, PwC.

Even companies are divided on the announcement.

“I think there is a relief for the consumer in the middle segment for tickets of up to Rs2,000, especially as service tax in our sector is high at 14-17%,” said Sayed Safawi, managing director and chief executive officer, VLCC Health Care Ltd, who is of the opinion that this will spur spending, especially among mid segment consumers in tier II and tier III cities and also provide a boost to digital payments.

However, if the service tax exemption is only on the transaction charge by the merchant then hardly 0.2% is waived off. “This effectively does not incentivise the consumer to spend. Nor does it really benefit me as a service provider as this charge was anyways nullified for me due to input credits,” said Vikram Bhatt, founder and director, Mumbai-based salon chain Enrich Salons and Academy.

Also by itself the waiver of service tax on transaction cost is not enough in encouraging merchants to go digital.

“People should not be penalised for digital transactions. The government should look at creating a level playing field as even transfer costs are high and can go up to 3.5% for services like Paytm,” said Riyaaz Amlani, managing director and chief executive officer at Impresario Entertainment and Hospitality Pvt. Ltd.

Every time a consumer uses a digital payment method like pre-paid card, credit card or digital wallet, the merchant has to pay a certain charge to the service provider which can vary from 1-3.5% depending on the service and the service provider.

Source: live mint

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