Tax Reform - Refund of Goods & Service Tax Collected against Income Tax

The proposal:

For Any Electronic Payment made against an invoice carrying GST, the end-consumer will get a refund of (10%-20%) of that tax amount in their Income Tax calculation. The amount will automatically reflect under their PAN card on the NSDL network. No additional paperwork needs to be filed for the same.

These electronic payments can be made through any acceptable medium including credit / debit cards, online transfers, IMPS etc. In fact, the user can also get an instant SMS confirmation of the Tax Credit.

This facility is only for the purpose of end-consumers, not at each level in the supply-chain

Revenue Implications for the Government:

Potential Loss: 

• < 10-20% of Service tax collection (at least some of the users may not have taxable incomes)
• to be refunded 12 months later when the IT returns get filed

Potential Gain: 

• Incentive for people to use electronic payment means which are mapped to their PAN
• Increase in Service Tax collection as any such payment will also require a GST invoice
• Increase in Income Tax from the seller / service provider as all such income will need to get recognized
• Reduced velocity of cash impedes absorption of fake currency in the economy
• Cost of printing, collecting, destroying and re-printing currency goes down

Invoice generation during a sale process has a number of positive side-effects. It acts as a control mechanism helping the entrepreneur get the exact amount of sale. This enables the entrepreneur to scale the operations further and provide a stable quality and customer experience throughout the network. It helps open branded saloons, restaurants, garages etc. which can stand for providing quality service at reasonable price.  

Today, someone who collects and pays service tax is at a 12% disadvantage to the tax evader. This forces all the entrepreneurs planning to provide branded, quality services to focus only on the premium segment of the society. 

While we need stronger action against evaders, incentivising end-users to ask for tax invoice will also be of great help.

Request: All such ideas on this blog may have a number of practical shortcomings. Still, I believe that these can form basis of robust solutions. It will be of great help if you can help punch holes in these hypotheses.