Tax Break On Payments Upto Rs 2,000 If You Use Card, Not Cash

New Delhi: Starting today, you will not be charged any service tax when you use your credit or debit card for upto Rs 2,000.  Currently, you pay 15% as the tax on these transactions. The exemption is part of the government's all-out initiative to steer the country away from a cash economy to digital transactions.

The tax breaks for using cards come exactly a month after Prime Minister Narendra Modi used an unscheduled televised address to announce that 500- and 1,000-rupee notes would, just hours later, be illegal. They can be deposited in banks till December 30.

Yesterday, the Reserve Bank of India disclosed that Rs 11.5 lakh crore ($170 billion) or 75 per cent of the outlawed notes have been turned in already. Critics of the demonetisation drive say this proves that the reform has failed at cracking down on black or untaxed money.

The cancellation of high-denomination notes detonated a vast cash crunch: the withdrawn bills formed 86 per cent of the currency in circulation. The situation was exacerbated by a scarcity of new bills, though the government has reassured that conditions will improve by the end of the year. Banks continue to run out of cash within a few hours of opening and remain packed with people desperate for currency.

Various analysts say the cash shortage could end India's run as the world's fastest-growing large economy. But yesterday, the Reserve Bank of India unexpectedly did not lower its key policy rate.

A few weeks ago, in another incentive for digital transactions, the RBI doubled the allowed balance kept in prepaid wallets from Rs 10,000 to Rs 20,000.

India's economy grew by an annual 7.3 per cent between July and September, the fastest for any large economy. Data from last month was discouraging, showing auto sales plunged and service-sector activity contracted.