Digital payments don’t need fiscal intervention

Digital payments don’t need fiscal intervention

The committee on digital payments, led by Andhra Pradesh chief minister N. Chandrababu Naidu, submitted its interim report this week. The committee was constituted after the Union government’s decision to withdraw high-value currency notes, which resulted in a cash crunch in the economy. Apart from measures to smoothen digital transactions, the committee has suggested changes such as imposing a banking cash transaction tax on transactions above Rs50,000. After it was reported that some of the suggestions of the committee may be considered in the forthcoming budget, the finance ministry has clarified that the government has not taken a final view on the recommendations and a decision will be taken in due course. The government would do well to move carefully and avoid decisions that will have negative implications in the long term.
This newspaper supports the idea of moving to a less cash-dependent economy because of several attached benefits. For example, the use of digital platforms will leave a trail of transactions and make tax evasion more difficult, which will be a boon for an economy with serious fiscal constraints. At present, a number of things are working simultaneously in India that will increase transactions through digital modes. Technological developments such as increasing penetration of smartphones and development of applications such as the Bharat Interface for Money (BHIM) will help, for instance. The Reserve Bank of India (RBI) has given licences to new-age banks which are likely to come up with innovative solutions for payments as they roll out services. In fact, the shift to digital payments started before the currency swap was announced and a meaningful transition is likely to happen over time.
Therefore, the government should avoid taking some of the measures suggested by the panel as there is no need for fiscal intervention. The proposal to tax cash transactions above Rs50,000 is a non-starter and will create unnecessary disruptions. It is surprising that the panel actually made such a recommendation. India has a large informal sector which functions on cash and will take its time to completely move to digital modes of payment. A tax on transaction will be avoided to the extent possible. It is likely that a lot of money will move out of the banking system just to avoid transaction tax. Consequently, the move can result in outcomes that are exactly the opposite of what is intended. Currently, transactions above Rs50,000 require furnishing the Permanent Account Number, which is sufficient for tracking; a new tax will only create complications. One of the ways to discourage cash usage is to significantly reduce, if not completely withdraw, high-value notes from circulation. A composition of currency notes in favour of smaller denominations, supplemented by a strong digital payments network, would be more useful in discouraging the use of cash.
The panel has also suggested other measures, like a subsidy to non-income-tax assesses or small merchants for buying smartphones. It has further recommended tax refunds for consumers using digital payments. There are a number of problems with such ideas. There is no need for fiscal incentives to promote digital payments. It is highly unlikely that a subsidy of up to Rs1,000 for buying mobile phones will actually encourage people to use digital modes of payment. Similarly, there is no compelling need to give tax refunds to consumers as it will further complicate the tax structure and filling process which needs to be simplified. Likewise, special tax incentives to manufacture equipment such as micro ATMs should also be avoided, especially at a time when the government is working on reducing tax exemptions and bringing down rates.
Instead of these measures, what is needed at this stage is development of a broad architecture that will smoothen the functioning of the entire digital finance ecosystem; recommendations to this effect have also been made by the panel. The government, along with the RBI, needs to work on plugging regulatory gaps so that the system is in a position to scale up and handle large volumes of transactions. Currently, there are disputes between banks and mobile wallets. More work is perhaps required at the operational level to ensure that transactions are secure and consumer interests are well protected.
It is important to appreciate that the movement to digital payments will depend on technological developments, proper regulation and consumer protection. Fiscal intervention will only complicate matters.