Anand Ramachandran, Chief Finance Officer, TechProcess Payment Services Ltd, urges the Hon’ble FM to introduce to the Union Budget 2015-16:
(a) rules to deem cash transactions above certain value illegal
(b) charge a fee on large cash withdrawals with additional scrutiny and,
(c) announce tax rebate for businesses accepting electronic payments.
India is one of the most paradoxical economies of the world. The world’s second most populous nation, 10th largest economy and the largest democracy, still uses paper cash to settle a majority of retail transactions. This presents a huge challenge for scaling up of the economy. Our bank notes in circulation to GDP ratio stands at 13% which is way higher than the global range of 2.5 to 8%. In FY13, we had 76 billion notes in circulation with a value of INR 13 trillion, which towers over an advanced economy like the US which had 34 billion notes with a value of USD1.2 trillion. For perspective, India’s GDP is around USD 2 trillion while the US is around USD 17 trillion. Another staggering statistic is that 75% of all notes printed in a year are withdrawn from circulation due to unsuitability, which creates a massive logistical nightmare for the authorities. In FY13, RBI spent INR 27 billion on just the activity of currency issuance and management. We have not even touched upon the issue of counterfeit currency, which is rampant in many border areas. Countries, like India, depend on imported machinery and supplies to print currency and therefore, are extremely vulnerable to counterfeits. The implications on law, order and stability are enormous.
Now, if all this does not make for a case for less cash in society, what does? Since there is no concrete development in changing the payments scenario, we need path-breaking revolutionary ideas to transform our payment behaviour. The dependence on paper currency is deeply rooted in our culture and psyche. Part of it has to do with lack of mass electronic payments infrastructure, but then it’s a chicken-and-egg situation. Vendors don’t invest in electronic payments due to lack of revenue incentive and consumers don’t adopt due to lack of acceptance mechanisms.
The entire tax and regulatory mindset must evolve into an encouraging environment for bank and electronic transactions and focus on eliminating cash. We must remember that a digital transaction can be traced later as it leaves a footprint, making it safer than any other form of payment. First, introducing a penalty for large value cash transactions will build trust among customers. Let’s say, derecognise the legality of any cash transaction above Rs 20,000 (this is in line with Income-tax law which disallows business cash expenditure above 20k).
Second, outlaw ‘surcharging’ i.e. charging extra for card transactions, especially debit card, since RBI has already capped the fees that merchants pay. Once consumers insist on paying by card and stores encourage digital payments, then the landscape will change dramatically. On the incentive side, provide tax breaks to businesses, accepting electronic cash. This can be in the form of rebate or outright deductions. Contrast that with our current regime where card spends above a certain amount invite extra scrutiny – as if spending by card equals evading tax!
Similar measures have been adopted by many countries, e.g: Korea gives tax rebates to consumers who show expenditure in cards. Nigeria launched the Lagos Project which prohibited banks from offering cash-in-transit services to their corporate customers. India has a golden opportunity to reap the benefits of Jan Dhan Yojana and Digital India programmes into a seamless cash-free ecosystem.
Hence, I would urge the Hon’ble FM to introduce (a) rules to deem cash transactions above certain value illegal (b) charge a fee on large cash withdrawals with additional scrutiny (c) announce tax rebate for businesses accepting electronic payments. The net benefits to the nation are enormous as the revenue lost in rebates will be more than compensated for by additional flows coming into the ecosystem.