Southern Economist-Volume 50 Volume 17 JANUARY 1,2012 -----------------------------------------------------
The title of the article is not contrary. Small is not only big but enormous. We ignore small and do not pay any heed to it, as we do not understand the potential of small things. A sea is accumulation of drops of water. We ignore drops of water, but when it becomes a sea, we notice it and understand the importance of small.
Similarly, accumulation of small savings becomes big. Small savings of people play important role in the development of an economy. A paisa has no value, has no purchasing power, but when one saves 100 paise, it becomes a rupee which has purchasing power. By savings a rupee, it may, in due course become a million?
This is the power of accumulation. Atom is very small, but has tremendous power of distruction. So is small not really big? The problem with us is that we ignore small and miniscule. A news appeared in 2004 in the Times of India which read that banks have accumulated cores of rupees by rounding off the amount of tax collected.
Decision of Supreme Court
“The Supreme Court orders the creation of a 723 crore corpus fund for the welfare of more than 100 million physically challenged persons in the country. The fund will be created from the excess amount raised by the Government by way of rounding off the interest tax and interest by the banks and other financial institutions from the borrowers from the last several years.” “It also directed the Indian Banks Association (IBA) and other institutions concerned to contribute 50 lakhs each.”( “NEW DELHI, APRIL 20, 2004)
‘The Karnataka High Court held that the action of the bankers was illegal and directed that the excess amount be collected by the Union of India from the banks and deposited in the Government funds. The IBA filed the present special leave petition against the impugned High Court order. Upholding the judgment, the Supreme Court Bench held that the Reserve Bank could not have empowered the banks to charge something more from the borrowers by the process of rounding up of interest.’
What is rounding off?
Rounding off is the method to absorb the fraction figures appearing on bank / tax documents for banking / departmental ease.
Guidelines
1. As per Section 288 B of Income Tax Act, 1961, rounding of Tax, etc., means ‘The amount of tax (including tax deductible at source or payable in advance), interest, penalty, fine or any other sum payable, and the amount of refund due, under the provisions of this Act shall be rounded off to the nearest rupee and, for this purpose, where such amount contains a part of a rupee consisting of paise, then, if such part is fifty paise or more, it shall be increased to one rupee and if such part is less than fifty paise, it shall be ignored.’
2. As per Section 44 B of Gift tax Act rounding off of tax, etc. means ‘The amount of gift-tax, interest, penalty, fine or any other sum payable, and the amount of refund due, under the provisions of this Act, shall be rounded off to the nearest rupees and, for this purpose, where such amount contains a part of a rupee consisting of paise, then, if such part is fifty paise or more, it shall be increased to one rupee, and if such part is less than fifty paise, it shall be ignored.’
3. Central Excise as per Section 37 -D of the Central Excise Act, 1944 which has been made applicable to Service Tax Law by virtue of Section 83 of Finance Act, 1994 (as amended), provide that the amount of service tax, interest, penalty, fine or any other sum payable and the amount of refund or any other sum due, under the provisions shall be rounded off to the nearest rupee and, for this purpose, where such amount contains a part of a rupee consisting of paise then, if such part is fifty paise or more, it shall be I increased to one rupee and if such part is less than fifty paise it shall be ignored.
4. As per Section 38A of The Bombay Sales Tax Act, 1959,‘The amount of tax penalty, interest, composition money, fine or any other sum payable, and the amount of draw back, set-off or refund due under the provisions of this Act, shall be rounded off to the nearest rupee and, for this purpose, where such amount contains a part of a rupee consisting of paisa, then, if such part is fifty paisa, or more it shall be increased to one Rupee and if such part is less than fifty paisa then it shall be ignored Provided that nothing in this section shall apply for the purpose of collection by the dealer of any amount by way of tax under this Act’
Thus the law is very clear, if the amount in paise is less than 50 paise it has to be ignored and if more, it is to be rounded off to next rupee.
Withdrawal of 25 paise and below coins;
Vide notification number S.O.2978 ( E ) of Ministry of Finance,(Department of Economic Affairs) dated 20th December,2010 the Government of India decided to withdraw coins of denomination of 25 paise and below from circulation with effect from June 30, 2011.
“According to the Reserve Bank of India's books, at the end of March 2010, there were 54,738 million “small coins” (which, by definition, include the 50 paisa), adding up to 1,455 crore. The demonetisation of what is virtually “dead money” will enable the RBI to issue currency notes or coins for an equivalent amount as replacement in the monetary system.” 1
The Reserve Bank of India has therefore instructed banks maintaining small coin depots to arrange for exchange of coins of denomination of 25 paise and below for their face value at their branches. The coins will be exchanged at the branches of these banks as also the offices of the Reserve Bank till the close of business on June 30, 2011. Coins of denomination of 25 paise and below will not be accepted for exchange at the bank branches from July 1, 2011 onwards. However, it was not clear how a person with only one coin of 25 paise would be paid. If the coins of less than 49 paise have been withdrawn, naturally the responsibility of both RBI and the Government is to ensure that the prices are not quoted less than 49 paise. This is a good step on the part of RBI as you do not get any thing below 50 paise say even in one rupee. We say it is mainly due to the inflationary trend in the economy.
Every thing in this country is galloping at a faster rate. It is not that the prices of imported crude are high, but the duty, taxes levied by government and state government is high. Obviously, leading to high cost. A farmer has to pay for diesel so that he can use pump, pay for transportation charges etc. "The way inflation is rising, product prices are changing almost on a daily basis and so the rounding-off works both ways, higher and lower." 2
Petrol Pumps have recently gained a lot of importance in the recent past. This is mainly due to the increase in the number of cars in India every year. In today's India, cars are no more objects of luxury. It has become an essential commodity, hence the importance of Petrol Pumps as well. Even the public transport has become costly. One does not know about the frequency of public transport, more over it is difficult to travel in ease. The effect of the round-off in pricing is different in various segments. In the absence of an alternative pricing mechanism, the consumer usually ends up paying the upper round-off cost of the product.
Take an example, price of petrol in India ranges from 70.53 paise to 74.48 paise per litre. Obviously, a person has to shell out 71 per litre (where the price is 70.53 and in the event where the price is 74.48 he has to shell out 74.50 in fact it is 75 .(as coins of 50 paise are not available.)
The question arises who gets the amount of loot from public.One of the employee’s of a petrol pump said that “On an average they earn around 350 per day due to rounding off the amount. He said that on weekdays the amount becomes over 500. He was of the view that those pumps which are on highways, tourist places, metros or which get more trucks or are at a prime locality get much higher amount in rounding off. He was of the view that if the owner was present before finalizing the amount of sale, he takes away half the amount and remaining is left to be shared by all the workers at the petrol pump. He further stated that we keep on calculating the amount and siphon it off every hour. Though there was no exact number of petrol pumps available, however, it was advised that there are over 1.5 lacks petrol pumps in India. Thus it amounts to .5.25 crores a day from petrol pumps alone meaning 157.50 crore a month, and who share the loot –owner of the pump and the staff. “There is no profit without a type of fraud; totally fair exchange leaves you with a profit of zero.”3
In the absence of an alternative pricing mechanism, the consumer usually pays the higher amount of the product. Millions of such transactions take place every day all over the country and consumer is penalised. It is not that the petrol pumps are part of the loot, every merchant is the part of the loot. Take another example. Just to give the prices of some of the medicines;
Medicine Cost Paid by a customer
Acitrom 2 mg Price Rs.109.64 Customer pays Rs . 110
Ecosprin AV 75 Price Rs.18.77 Customer pays Rs. .20
Digoxin Price Rs.16.75 Customer pays Rs.17
Nitrocontin 2.6 Price Rs.114.30 Cstomer pays Rs.114.50
Bicosule .Price Rs. 21.23 . Customer pays .21.50
Take another example. How the big shopping malls like Spenser, Big Bazar ,Reliance Fresh etc ., price their products; Have a look at the prices of some of the vegetables.
Big Bazar: Vegetables Cost Paid by a customer
Potato Price .Rs. 9.90 Cstomer pays Rs. 10
Tomato Price Rs..20.90 Customer pays Rs.21
Onion Price Rs..20.90 Cstomer pays Rs.21
Spenser Vegetables Cost Paid by a customer
Potato Price Rs. 9.90 Customer pays Rs.10
Tomato Price Rs.26.90 Customer pays Rs. .27
Onion Price Rs.19.90 Customer pays Rs.20
Capsicum Price Rs. 59.90 Customer pays Rs.60
Pomegranate Price Rs.154.90 Customer pays Rs.155
Kashmir Apple Price Rs.109.90 Customer pays Rs.110
It appears good that the price of potato, tomoto, onions etc., is less but what do you pay, you pay in full. Many a times we have no option but we accept it with a pinch of salt. I myself requested both Spenser and Big Bazar at Lucknow that when you can not give me back 10 paise, what is the purpose of pricing a product at 9.90? The reply was “It is management’s policy”. Are we not fooling people? Is this not a market gimmick? Why put 9.90 better put 9.55” even in that event you would be getting Rs.10 and people would feel that it is all the more cheaper.
The impact of coins of 25 paise and below have forced postal department to increase the prices of their products. “With loose change hard to come by, India Post would be rounding off the price of all its products to the nearest rupee to “overcome problems in daily transactions”. And in the process, the government hopes to reduce the postal deficit which stood at 6,345 crore last fiscal year. Sources said the Department of Posts has proposed that the price of ordinary postcard be doubled to 1 while money order forms to be sold at 1 — four times its present price - following the discontinuation of the 25 paise coins by the Reserve Bank of India from July 1. 4”
The Psychological Pricing Theory
Psychological pricing is a marketing practice based on the theory that certain prices have a positive emotional and psychological impact. The retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £2.98. The theory suggests that this drives demand greater than would be expected if consumers were perfectly rational. Psychological pricing is one cause of price points. The theory is based on one or more of the following hypotheses: 5
“Consumers ignore the least significant digits rather than do the proper rounding. Even though the cents are seen and not totally ignored, they may subconsciously be partially ignored. Some suggest that this effect may be enhanced when the cents are printed smaller (for example, $19.99).
Fractional prices suggest to consumers that goods are marked at the lowest possible price.
When items are listed in a way that is segregated into price bands (such as an online real estate search), price ending is used to keep an item in a lower band, to be seen by more potential purchasers.
‘An analysis of 840 advertisements revealed that odd prices, in particular prices ending in the digit 9, clearly outnumbered all other price endings. In total, 87% of prices were defined as odd prices. Approximately 60% of prices ended in the digit 9, with a further 30% of prices ending in the digit 5. Thus, approximately 90% of prices ended in either "9" or "5". Three digits (0, 5, 9) accounted for nearly 97% of price endings, with the remaining seven digits accounting for only slightly over 3%. Whatever pricing methods retailers use, there is a definite bias in favour of odd price endings” 6.
What Government should do?
When Supreme Court has ordered creation of a fund for disabled, why not government, pass legislation for depositing the amount by business institution. First and foremost thing is to put a ban on all those merchants that when they can not pay change, then what is the purpose of putting prices ( . 9.90) when you can not refund 10 paise. Another thing is that all prices should be in the multiple of 50 paise only. While deciding petrol, diesel, gas prices these should be in multiples of 50 paise. Benefit has to be given to customers and not to the merchant. Alternately, issue plastic coins of all denominations.
As per Indian coinage Act, the responsibility of the Government is to mint coins and make it available to public. Government and RBI say that people are melting coins as the value of coin is more than the real value. If this be the case, then better have plastic coins. It would be cheaper and there would not be any chance of melting coins. Supply enough plastic coins and the problem would be over.
What is the position in other countries?
If the price of a commodity in USA or as a matter of fact in any country is say $ .99 you get back one cent. There is no such system of not getting back one cent. Even though it is miniscule, but you get it. However, what is in our country. You price a product in such a manner that the customer has to pay additional amount.
There is need to revise the definition of consumer crime. Consumer crimes are exploitation of consumers using unfair means and unethical trade practices. Consumer theft is among the list of consumer crimes. Let’s face it, it has become a part of our society and on a much smaller scale it is actually corruption deeply embedded and accepted in the system. The point is not how much ‘extra’ they are earning but how we have come to accept such unfair and unethical means of doing business.7
Neither government, nor the RBI has ever worked out the amount of loss to people, as it is in change. But it is expected that in this country approximately over 300 crores are pumped into the system every day, and do we have any option? Who is benefitted, obviously merchants. Is this amount not black money? Who is accounting for this? Supreme Court order has ordered creation of . 723 cr. corpus for physically challenged from the amount of rounding off of taxes. Will government or RBI do some thing in this regard?
References:
1. Editorial , March 3, 2011, The Hindu
2. www.rediff.com “Rounding off prices: Small change, big turnover”
3. Robert Engler and Yuriko Hayanshi,” The way of Thinking: The Prophecies of Japan’s Kunituro Yamate” Tulsa: Council of Oak Books,1995, ( p124-5 )
4. Financial Express 13th October 2011
5. http://small business com
6. ‘The Widespread Use of Odd Pricing in the Retail Sector’ by Judith Holdershaw, Philip Gendall and Ron Garland, Marketing Bulletin, 1997, 8, 53-58, Research Note, http://marketing-bulletin.massey.ac.nz
7. 7.http://blogs.tribune.com.pk/story/1772/are-you-being-robbed-one-rupee-at-a-time/
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