Tax sops for card payments is targeted at the wrong end

Though the idea is laudable, the government needs to incentivise the consumer who pays cash instead of the receiver

The Union Government is planning to minimise use of cash in the economy by proposing to give income tax benefits for transactions made using credit or debit cards. The idea is to make the country a cashless economy, reduce tax avoidance keep track of expenditure trail. In fact, the government has also proposed making it mandatory to settle transactions worth more than Rs 1 lakh through electronic mode, which it expects will reduce the circulation of black money in the system.
 
The need was felt because India is one of the most cash-intensive economies in the world. A report on 'Cost of Cash in India', commissioned by MasterCard and brought out by the Institute For Business In The Global Context, has pointed out that cash-to-GDP ratio for India stands at 12 per cent which is almost four times as much as that of Brazil (3.93 per cent) and South Africa (3.73 per cent).

 
As per the report nearly 86.6% of the transactions in India are through exchange of cash, 6.8 per cent is through electronic clearing house (net transfers), credit and debit cards account for 4.1 per cent and cheques and drafts based transactions are only 2.5 per cent.
 

Another way of looking at the size of physical cash in circulation is the number of pieces of the physical currency in the country. India has 76.5 billion notes in circulation which amounts to $12,468 billion, while the USA has 34.5 billion notes amounting for only $1,198 billion and the entire Euro Zone has 15.8 billion notes totalling $1049 billion.

 
The government’s motive of bringing down usage of cash in the economy is because there is a cost involved in printing and circulating the money. Besides, new notes need to be regularly brought in the economy to prevent counterfeiting.
 
Though the idea behind the move is laudable, the government is trying to incentivise the wrong section of people. Rather than motivating the consumer who pays cash, the government is trying to incentivise the receiver who is, say, a shopkeeper.  
 
If there are payback incentives or a rewards points system on higher usage of card, consumers will be willing to increase its use. Some banks offer a points-based scheme to increase the use of their cards, but these are generally on credit cards and the intention of the banks is merely to collect more fees and interest which cannot be the government’s intention.

 
The government can take a cue from oil marketing companies who have tied up with banks and have a payback scheme or discount scheme on fuel consumed from their brand outlets. Consumer goods companies can be encouraged to launch similar schemes which, in turn, will compel the consumer to use the cards to avail of the benefit.
 
As for shopkeepers most of them barely pay tax and not all their transactions are recorded. Similarly, a number of hotels, especially the smaller ones, deal primarily in cash and do not disclose all their transactions. Doctors and lawyers largely deal in cash and many private practices do not have any swiping facility.

 
A reason that the shopkeeper and other smaller business outlets do not like usage of cards is because he gets the money from the card company after a couple of days, that too after deducting a fee. If these impediments are removed and money is received in the shopkeeper’s bank account by the end of the day, he will be more than happy to install a swiping machines rather than risk handling cash.  
 
There are many consumers who do not transact using cards because the shopkeeper passes on the transaction cost to them. Removing transaction cost will be a welcome step rather than standardising it across the board.