The Goods and Services Tax (GST) Council on Saturday cleared a pilot project to offer digital incentives, in the form of cashback of 20 per cent of GST paid on business-to-consumer transactions using RuPay and BHIM platforms, subject to a cap of Rs 100 per transaction.

Revenue shortfall concerns and issues being faced by micro, small and medium enterprises (MSMEs) dominated the 29th meeting of the GST Council. The Council approved a six-member ministerial panel, headed by Minister of State for Finance Shiv Pratap Shukla, to look into the issues of MSMEs.

“We have decided to undertake a pilot project. A broad framework has been worked out so that users of RuPay card, BHIM, Aadhaar, UPI, USSD transactions can be given the incentives because these are mostly used by poor people,” said Finance Minister Piyush Goyal, adding that the pilot programme will be implemented in any state on a voluntary basis.

The revenue department and GST Network (GSTN) will coordinate with the National Payments Corporation of India (NPCI) for the development of software to facilitate the refunds in these digital transactions. “The burden will not be put on the dealers. Software will be developed by NPCI to facilitate the cashback. First, it will be rolled out on pilot basis, and then, after seeing the results, will be considered for a nationwide rollout,” said a senior government official.

Uttar Pradesh, Bihar, Maharashtra, Gujarat, Tamil Nadu and Assam have opted to join the digital incentives pilot project, officials said.

Bihar’s Deputy Chief Minister Sushil Kumar Modi said the revenue impact of the cashback/ refund for these digital transactions is expected to be around Rs 980 crore when it gets rolled out nationwide. “Compliance will increase. In the longer run, it will encourage formalisation of the economy,” he said.

West Bengal’s Finance Minister Amit Mitra pressed the need for a relook at incentives in the wake of revenue considerations. “Already Rs 43,000 crore is the estimated shortfall in the first quarter of this fiscal. If we give incentives and reduce revenues, the shortfall will increase. If we give one incentive today, then tomorrow we will have to give 10 other incentives,” he said.

The ministerial panel for MSMEs, which includes Delhi Deputy Chief Minister Manish Sisodia, Bihar Deputy Chief Minister Sushil Modi, Assam Finance Minister Himanta Biswa Sarma, Kerala Finance Minister Thomas Isaac and Punjab Finance Minister Manpreet Singh Badal, will look into recommendations of fitment and law committees on tax rates and policy. States were of the view that since MSMEs were exempted from excise duty with turnover up to Rs 1.5 crore in the pre-GST era, they should continue to get some relief under GST as well.

Rate cuts, however, will not be considered in the near term as of now in the wake of revenue concerns. “During the meeting, Union Finance Minister was also of the view that the Council should now adopt, in the RBI’s parlance, a pause in rate cuts,” said the official.

Delhi’s Finance Minister Manish Sisodia said MSMEs need to be given importance since they are employment generators. “There are big businesses which give more taxes, but then there are small businesses which are large in number, which give employment. Both have to be given importance. The rule shouldn’t be such that we brainstorm for those who give more tax to government… with this, MSMEs will get the required support,” he said.

Punjab’s Finance Minister Manpreet Singh Badal also echoed the same views. “The small and medium industries may not be paying 50 per cent of tax but they give huge amount of employment of 70-80 per cent… Something has to be done. Small and medium industries cannot fade away,” he said, adding that even if the GoM does not finalise its report within six weeks, it will submit interim reports after consultation with the fitment and law committees.

The proposal to incentivise digital payments was considered at the 27th GST Council meeting in May also, but has now been trimmed considerably to soften the impact on revenue. The earlier proposal of 2 per cent concessional rate for digital payments under GST in B2C transactions (for GST rates 3 per cent and above) was estimated to cost the exchequer around Rs 10,000-25,000 crore.

One in every four items has seen a rate cut in the 13 months of GST rollout. Rate cuts on over 350 items, out of total 1,211 items in the five broad categories of zero, 5 per cent, 12 per cent, 18 per cent and 28 per cent, are estimated to result in a revenue loss of about Rs 70,000 crore a year.

Tax experts said the select rollout of digital incentives would help in limiting the revenue impact and also help in creating a trail of GST transactions. “The incentivising of digital payments would help in maintaining a better database by the government and tracking the footprint of various taxpayers. Also, with the committee for addressing MSME issues in place, further simplification of GST compliance and other issues for this sector should soon be in place,” said Abhishek Jain, Tax Partner, EY.

In the Budget for 2018-19, GST collections, including compensation cess, have been pegged at Rs 7.44 lakh crore, out of which the Centre aims to collect Central GST (CGST) of Rs 6.04 lakh crore and Integrated GST (IGST) of Rs 50,000 crore. In theory, IGST is supposed to be equally divided between Centre and the states. Adding State GST (SGST) collections, the government is aiming a monthly target of Rs 1-1.12 lakh crore.

So far, the government has collected Rs 3,89,567 crore from GST — Rs 1,03,458 in April (for March), Rs 94,016 crore in May (for April), Rs 95,610 crore in June (for May) and Rs 96,483 crore in July (for June).

The next GST Council meeting is scheduled to be held in Goa on September 28-29.