Editorials, GS-3, Uncategorized

A carrot for the honest

A lot has been discussed about pros and cons of a cashless economy. However, with government’s recent plan to allow more free ATM transactions, this topic has once again come to the fore.

  • Few experts argue that instead of encouraging more free ATM transactions, the government should rather bring in policies that encourage cashless transactions.
  • ATM transaction does have merit, since withdrawing money from ATMs costs banks less than encashment at bank branches. But it is about time a real comparison was made of debit card usage at ATMs and in electronic transactions and direct policy moves suitably.

What exactly is a cashless economy?

It can be defined as a situation in which the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer and Real Time Gross Settlement in India.

Benefits of cashless economy:

  • Increased efficiency in welfare programmes as money is wired directly into the accounts of recipients.
  • Efficiency gains as transaction costs across the economy should also come down.
  • Reducing use of cash would also strangulate the grey economy, prevent money laundering and even increase tax compliance, which will ultimately benefit the customers at large.
  • Usage of cashless mechanisms would also ensure that loopholes in public systems get plugged, and the intended beneficiaries are able to avail the benefits due to them.

How does a cashless economy affect the stakeholders involved in it? Take for example, the trader who sells grocery and other products:

Under the current scheme of things, the seller of goods obviously has a lot to lose by accepting the debit card (going cashless).

  • For one, he stands to pay a merchant discount rate (varying from 0.75% to 1%), and this eats directly into his margin.
  • More importantly, he also knows every such transaction is accounted for and, therefore, liable to be taxed.
  • Suppose a sales tax concession is offered for such point-of-sale payments to go electronic as has been suggested in some quarters. Even then the shopkeeper would not be motivated — he’d much rather save the entire tax than claim a small indirect tax rebate for supporting the cashless drive.

Then, how to tackle this problem?

The immediate solution lies in giving a small incentive to the taxpayer to use his card or mobile. Nothing but “a carrot to the honest”.

  • For example, the government could grant a 5% income tax rebate for taxpayers who make more than 85% of their payments in cashless mode. The required percentage of cashless transactions for rebate eligibility could be even higher for very high income groups.

Then, will it not be a complex task for a taxpayer to claim a rebate?

No. A routine bank statement/certificate stating percentage of cash debits separately should suffice to claim the rebate.

  • Besides, personal banking statements are already being used to show interest income accrued and tax payable/deducted.
  • So administering such incentive would involve no extra burden either on the banks or the taxpayer.

Will it cause any loss to the exchequer?

As per the data on Department of Revenue’s website, Rs. 1.71 lakh crore was collected as personal income tax in 2011-12, registering an average compound annual growth rate of 14.81% for the period between 2006-07 and 2011-12.

  • Applying the same growth rate, the estimated collection in 2015-16 would be Rs. 2.96 lakh crore. Assuming that the government chooses to pay 5% rebate and 25% of taxpayers qualify, the payout is still only Rs. 3,700 crore.
  • Various studies have shown that the total cost for ATM operations is roughly around Rs. 18,000 crore. Even if this shift to cashless transactions were to reduce ATM transactions by just 25%, it would still save the banking sector around Rs. 4,500 crore in ATM costs alone.
  • And if we were to top up these savings with a hugely conservative estimate of 1% resultant increase in sales tax/value-added tax revenues across States, that would be another Rs. 4,400-plus crore.
  • Revenue-wary policymakers can even fine-tune eligibility percentages and the percentage of rebates to play it really safe.

Implications:

  • Since the rebate has to be earned over a year, the human tendency would be for taxpayers to switch to cashless transactions as a matter of habit.
  • And merchants who hesitate to honour a card will find themselves being pushed to do so.

Way ahead:

Savings in ATM subsidies could get suitably channelled to give adequate incentives for establishing an operating infrastructure in rural areas for accepting electronic payments and providing cash-out facilities.

Conclusion:

Income tax rebate for cashless transactions could well trigger a series of coordinated policy tweaks that could help boost revenues for the government, productivity for the economy and an effective infrastructure for direct benefit transfers and financial inclusion. The time is ripe for a transition to a cashless economy. But, yet a lot needs to be done before cash is eased out of the Indian economy.

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