India's three million-odd credit card users were dealt a deadly blow on July 16 this year, and most of them did not even notice it, until only very recently. Take, for instance, the case of Delhi businessman Rajeev Desai, who claims to be an enlightened credit card user. When he received his credit card statement for October, he got a rude jolt. The interest charged on his balance seemed whopping, plus there were other minute entries which added up to quite a bit. A call to the credit card call centre left him wiser and sadder. The higher bill was thanks to a 5 per cent service tax levied on all bank charges by the government from July 16. To be fair to the card companies, they had informed their users in advance. But many, it seems, had either missed the caveat or failed to realise its implications.
In fact, the 5 per cent double-whammy has seen both credit card companies and their subscribers smouldering in protest. Already, India has among the highest interest rates charged by credit card companies, between 2.5 per cent and 2.95 per cent a month on any outstanding amount on the card. That compounds to 34-40 per cent annually. This is huge compared to what one pays for housing and car loans—about 12 to 14 per cent a year. Even personal loans are cheaper now. Post July 16, the date the service tax took effect, your credit card burden just got heavier by 5 per cent.
And it's not as if the government would be laughing all the way to the bank. The total card spend in India is estimated at
Rs 8,500 crore, growing at about 30 per cent a year. About 30-40 per cent of this gets revolved (that is, the user pays up only a part of the bill, postponing the payment of the balance), so back-of-the-envelope calculations suggest the service tax will be primarily slapped on an amount of Rs 300 crore or so on an average, resulting in an inflow of Rs 15 crore to the government. Apart from the revolving balance interest, the tax will also be charged on all fees and cash advance fees, which may add another Rs 15 crore-odd to the kitty. Hardly an amount for the government to lose sleep over. Says Sameer Vakil, country manager, South Asia, Mastercard International: "It is not as if people revolve credit 100 per cent. So the collection for the government will be limited."
For a welfare-oriented Indian government, taxing credit card spend is a small beginning made to taxing expenditure, which many feel is more egalitarian than income tax. But, as an American Express spokesperson says, "less than 1 per cent of the private consumption spending in India is on credit card. There is a strong cash economy here". The success of the government move, therefore, depends strongly on an expansion of the card business—either the subscriber base or the annual card spend or both. Ironically, say industry sources, going by the initial reaction to the service tax among the users, none of the objectives may be fulfilled.
More, the already hesitant credit card user might just return to cash. Says Pushpendra Mehta, senior consultant, Credit Card Management Consultancy: "The tax is a deterrent and people who spend or revolve over Rs 10,000 on their cards regularly will feel the pinch. They will go back to cash." Adds a Citibank spokesperson: "The tax may deter new people from entering the category. It may also cause existing cardholders who carry multiple cards to consolidate to fewer cards."
There is also an element of double taxation here. The industry has been arguing with the government that the use of credit cards actually encourages invoiceable sales which in turn leads to payment of tax. "With credit card already one of the six items which compel individuals to file an income tax return, owning a credit card actually means you can be queried by the IT department. This has already been working as a deterrent, with people preferring to use cash. Thus the government is actually encouraging a parallel economy," argues an industry spokesperson.
Will the government yield to industry representations and do a rethink on the service tax in the coming Union budget? The chances are bleak. Meanwhile, for the country's credit card users who are reluctant to pay anything extra, the best advice would be: pay up your card bills promptly, revolve as little as possible, and limit emergency cash advances and draft facilities.