For bargain hunting Indians, GST offers long-term digitisation benefits and not the incentives

Dated 14th December, 2016

The government seems to have set a new goal for the economy post demonetisation which is driving more cash transaction towards digitisation. With this the objective will bring the informal economy into the banking world and potential tax purview. This is important as the deadline for the GST implementation approaches, which is expected to lift the government's overall revenues.

A temporary reprieve, ranging between 0.75 percent to 1 percent, has been given for transactions for booking railway tickets, payment of petrol and diesel and others. The objective is that the bargain hunting Indians will move to digital transactions because of these benefits. There is a lesson in consumer behavior which the mandarins need to accept and understand. Bargain hunting Indians will switch to digital transactions because of these benefits, but can also move out as soon as these benefits get over.

Take the fancy discounts the number of digital wallets offer nowadays, but once these offers are over consumers would move to the next wallet in case of any fresh offering. These companies make such clever moves to stay above the clutter in the digital wallet space by simply burning the reserves.

But the government shouldn't assume that the consumer is stupid. Any change in consumer behavior that is economic over the long term does not happen without clear economic benefits. It is not if the consumer will adopt a digital wallet and will remain with it forever. He will continue only if there are sustained benefits in the long run. This is the core of any consumer behavior which look at brands that offer discounts or are known to offer it on a regular basis. They see sales happening only when there is any discount offer, be it on an apparel or a shoe brand like Woodlands which is famous for its discount offerings. Almost through the year, every Woodland retail shop has a discount sign, while only the percent of discount offer keeps changing with the season.

This is also the reason why many brands refuse to offer any discounts through the year, but offer loyalty points that can be redeemed for subsequent purchases. But every brand in India, even luxury watch brands like Longines acknowledge it. President of Longines told Forbes India magazine recently, “We will never stop seeing the bargaining spirit of Indians.” This is particularly incisive as it is assumed that Indian consumers who are willing to splurge on a status symbol of watch still negotiate on the price. The bargain hunting spirit is what the government seems to be ignoring in its drive towards digitisation.

One collateral benefit of demonetisation is the realisation of transactions in the economy. Suddenly, every commentator and even the mandarins in the government is realising the importance of the transaction in an economy. This is a great realisation as the renowned economist Hayek, said, the economy is nothing but transactions that take place. To continue in the same phase GST is doing nothing but capturing all these transactions some for the first time. Therefore, it is important that the government looks at how GST will handle digital transactions. It does not have to look far, as Chennai-based economist and modeling expert G Ramachandran has devised a ‘Price Percentage model’ (PPM).

The model defines and explains how GST can be enabled for driving digital transactions. The beauty of PPM model is that it will not result in any revenue loss if any benefit is given for digital transactions. Whereas the government with its current model of incentives is expected to lose revenues. The estimate from Economic Times is that banks will lose Rs 1000 crore on the merchant card waiver fees. Another issue which the waiver does not easily cover is that of misuse, especially when the transaction cannot be verified by system. While Railways or oil companies may want to pass on the benefit to the consumers, will the system be able to detect misuse by dealers or agents, respectively.

In a GST environment, this misuse will be and can be detected as the transaction is linked to physical delivery or benefits of tax refund on inputs. The PPM model is therefore a revolutionary as it serves multiple purposes as it links GST benefits with digital transactions. It passes a subsidy to the buyer and seller for any digital transaction with a GST component. A long term solution for driving digitization is needed not short term incentives.