The Next Step To GST: Is Fiscalisation A Possibility In India?

Dec 28th, 2016

"Violation of tax laws these days doesn't cause a sense of guilt among us", said India's Financial Minister, Mr Arun Jaitley.

His words echo a turbulent truth that 'Indian Janta' hides consciously. He stresses on society requiring the change in attitude to combat corruption and tax evasion. How important the role of consumer/aam aadmi be in fiscal India under GST?

The consumer is at the last stage of the supply chain. He will bear the burden of(GST) goods and service tax coming in near future. As explained in our last blog on GST, any tax fraud or corruption in the middle of the supply chain creates cascading effect i.e. tax on tax burden, resulting in a price hike.

Will GST ensure that each consumer is taking receipts from a retailer? Or how does the tax authority inspects that the retailers are not making transactions in cash or 'kacha bill'?

Fiscalisation: Improving tax compliance

A government’s ability to collect tax is either determined by how informed government is of tax activities and how capable the government is to enforce the tax laws. Enforcing tax collection for transactions between retailer and consumer is a challenge.

Every time a consumer doesn't ask for the receipt and buys goods and services in cash, he is letting the retailer getaway from paying taxes to the government. The supply chain faces, 'last mile problem', where the consumer has no incentive or derive no monetary benefit from collecting receipts.

The challenge can be tackled via three ways. One, Indian consumers can suddenly develop a conscience and start collecting receipts. Second, the government can incentivise the consumers to ask for receipts. Third, the tax authorities can make use of advanced technologies to track each transaction between retailer and consumer.

Many countries(exemplified below) who have faced similar problems like India in the past didn't wait for consumers to grow a conscience. With the help of advanced technology, such countries have been able to enforce tax compliance by the method of fiscalisation.

According to The Herald, "fiscalisation refers to configuring of fiscal devices to enable them to record sales and tax information on read-only fiscal memory at the time of sales for use of tax authority in VAT administration"

What are electronic fiscal devices[EFD]?

Electronic fiscal device is used to describe the technological devices that tax administration uses to monitor business transactions. They monitor business to customer and business to business transactions. There is a fiscal memory in these devices that is tamper proof and certified only by the government official authority.

It is implemented at the point of sale or called as a checkout line. It comes with a printer, scanner for reading coded product, a terminal for manual entry of the transaction, storage for currency and a screen. A government usually implements two station point of sale where second station printer maintains all sales record for auditing and tax compliance.

Following are some of the instances of countries that have adopted strategies of fiscalisation –

Croatia: Tackles grey economy by adopting fiscalisation

A new fiscal law was introduced in Croatia in late 2011 that forced retailers to adopt and amend processes and IT infrastructure. On 1st January 2013, fiscalisation was implemented in large retailers, restaurant and hotels.


Similar to India's situation, Croatia has faced a financial and economic crisis that led to budget deficit due to decline in state revenues. Second, the existence of grey and shadow economy that included non-registered employees, unofficial renting of premises, illegal activities, reporting of lower revenue especially in industries with the retail sale(selling with no bills) and a large proportion of cash transaction. Third, the officials like lawyers reported revenues less than their possessions.

How was it implemented?

Fiscalisation happened in different stages. First, included the implementation of fiscal software at the point of sale. The government didn't force people to buy expensive hardware. The software could be upgraded to the existing software. Also, the businesses based on Information Technology were excluded where transactions were not done outside official system.

It works like this. A customer is charged for goods or services using POS machine in the presence of permanent internet connection. Each new invoice sends the data to the tax authority. The request generates issuer's security code. This forms an XML request containing issuer's security code that goes to the tax authority. The tax authority records the transactions and sends a unique invoice identifier to the retailer. The final invoice should contain issuer's security code and unique invoice identifier.

The whole process takes only two minutes.

The good and the bad

Fiscalisation is supported to combat grey economy but the success of the implementation is heavily dependent on a good internet connection.

Brazil: Incentivise the consumers to become 'tax-auditors'

The government of the state of Sao Paulo created Nota Fiscal Paulista( NFP) in October 2007 to reduce tax evasion of the state VAT and cultivate the culture of tax compliance. NFP gives tax rebates and lottery tickets for consumers who collect receipts.

For a given receipt, a consumer receives a tax rebate of 30% of the collected tax of each establishment. A registered consumer is also eligible for the monthly lottery. For every US$50 worth taxes, a consumer gives to NFP receipts per month, she receives one lottery ticket. Most prizes range from 5 to 25 dollars, and there are usually 3 large prizes from 15,000 to 500,000 dollars.

By the end of 2011, 40 million consumers have asked for receipts more than once, and 13 million people have created online accounts to the tax authority's website. However, the loophole is in the strategy because the firm/establishments can propose discounts to the consumers in place of rejecting receipts as the reward offered by the government is lower than the taxes paid by firms.

Zimbabwe: Digitises payments with fiscal devices

Fiscalisation was implemented in Zimbabwe on 8th June 2010 through statutory instrument 104 of 2010. According to the law, all the businesses who register under VAT category C with turnover US$240000 and above per annum should record their sales with electronic fiscal devices.


Zimbabwe government recognised leakages in the economy due to a large amount of informal sector including medium to small enterprises that remained outside tax bracket. More than US $7 to 4 billion was circulating outside the maintain stream economy.

The result of fiscalisation has been the recovery of $326,53 million during the first half of 2016. It also has a positive impact on VAT collection, as VAT on domestic sale role by more than 50% during first seven months of 2016 as compared to 2015.

However, the backdrop has been a massive government expenditure around US$10 million on VAT rebate for companies that adopted fiscalisation. The gadgets itself are expensive for many SMEs, costing around $US 600-200 per unit.

Similar to the above countries, the Czech Republic is reported to adopt Croatia's fiscalisation model.

There has been the scandalous loss of potential tax revenue of estimated 1 trillion EUR, that is 2000 EUR for every European citizen per year. The gateway adopted by Czech Republic government has been easily integrated with Infinia retail POS in the country. In the process, cash sales of goods are subjected to the electronic records.

It is calculated that the project will bring EET(exempt, exempt tax) annually up to 370-555 Mio. EUR.

Over to you!

From the above examples, it is clear that many countries have moved towards fiscalisation to improve tax compliance and tackle tax evasion and grey economy. India is already on its way by asking banks to implement three lakh Point of Sale terminals in the next three months. However, India may need additional 20 lakh Point of Sale terminals, as stated by State Bank of India. On top of that, retailers will need fiscal incentives from the government to adopt POS machines.

Looks like, in the coming year, POS machines are going to become 'a must have gadget' for all retailers in the shops.

Do you have the right POS for your business? Is it as flexible and easy to use, implement and integrate as Infinia retail POS? Our POS lets you manage inventory, sales, different retail chains, payment and more in the easiest fashion via iPad or tablet. To know what are the must have features for POS system in today's transformative retail environment, you may want to catch up with our next blog.

By- Gaurav Soni | Dec 28th, 2016 | Retail

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