Taxing cash

CMs' panel suggestions on digital economy are misguided

Shortly before the Union Budget is to be presented, a panel of chief ministers, led by Andhra Pradesh Chief Minister N Chandrababu Naidu, has presented an interim report to the Centre suggesting various measures relating to the use of cash in India. The panel was constituted by Prime Minister Narendra Modi shortly after demonetisation was introduced last year, and also included the chief ministers of Odisha, Madhya Pradesh and Maharashtra. Among its recommendations is that the Union Budget should include a banking cash transaction tax, or BCTT, on large transactions — of Rs 50,000 or above. Other recommendations from the panel included a subsidy to small merchants or non-income taxpayers to help them buy smartphones and that there be a cap on cash transactions in general, and that merchant discount rates or MDRs charged by banks on digital payments be decreased. Several recommendations for the further use of Aadhaar were also included.

The Centre should be congratulated for seeking broad-based inputs on how to take the push towards a less-cash economy forward. However, it seems the recommendations from this panel suffer, in part, from the very problems associated with demonetisation: A lack of clarity about objectives and a dismissal of possible collateral damage. The BCTT, for example, might severely inhibit economic activity. It has, after all, been tried before in the 2005-09 period. The then finance minister, P Chidambaram, had introduced this tax precisely to curb black money — but it did not prove particularly effective in that effort. That experience should have been learned from. However, other recommendations by the panel might be worthy of consideration. For example, the minimisation of cash transactions above a certain level. The suggested level of Rs 50,000 is debatable, however — the special investigation team on black money had suggested that limit be Rs 3 lakh. And an outright ban could be widely evaded where a marginal tax might not be.

The thinking behind many of these recommendations is generally problematic. A push towards a less-cash, more digitised economy is welcome. However, this should not come at the cost of taxing those who are on the wrong side of the digital divide for any reason. If an efficient digital economy is to be built, then it will have to be done by making digital payments more convenient and attractive, not by using state power to prohibit or tax. Cash is not inherently evil, and policy should not treat it like it is. The government is right to incentivise digital payments and to remove stumbling blocks in the way of their adoption — for example, better regulation and a more market-friendly approach to MDRs is necessary so that digital payments are not as costly as they are currently. But, penalising those who may have no access to or understanding of digital transactions — and thus prefer to transact in cash — is not the answer. Thus, making digital payments mandatory for government-related transactions, for example, would be misguided. As would be using the current climate to make Aadhaar compulsory through the back door in a manner that would be in violation of Supreme Court rulings on the subject. Instead, the government must work to make digital payments more viable and attractive.