Digital payments don’t need fiscal intervention


Context

In the light of the recently released report of the committee on digital payments article states that there is no compelling need to give tax refunds to consumer and fiscal intervention will only lead to complications on the road to less cash economy

A word of caution

Author states that after it was reported that some of the suggestions of the committee maybe 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

Boosting digital transactions

Article points out that 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
  • Licensing of new banksby RBI: 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

 

Author’s contention: Avoid taking some measures as suggested by digital payments committee

As the shift to digital payments started before the currency swap was announced and a meaningful transition is likely to happen over time, hence, Author contends that government should avoid taking some of the measures suggested by the panel as there is no need for fiscal intervention. Few of such steps are,

  • Taxing cash transactions: The proposal to tax cash transactions above Rs50000 will create unnecessary complications
    • Concerns of informal sector: India has a large informal sector which functions on cash and will take its time to completely move to digital modes of payment. 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.
    • Current norm is sufficient: Author points out that the current norm of furnishing PAN for transactions above Rs 50000 is sufficient for tracking purposes
  • Subsidy to non-income-tax assesses or small merchants for buying smartphones: 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
  • Tax refunds for consumers using digital payments: 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

 

Article suggests

  • Reducing the number of high value denomination: 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
  • Regulatory framework: 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.

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