Insights into Editorial: India should become world’s first cashless country
21 July 2016
Tax evasion has been a hot-button political issue in India for at least a decade. In a bid to evade taxes, many Indians deposit their money in illegal offshore accounts. In this regard, an investigative team of retired judges appointed by the government handed in the fifth of its reports recently.
Important recommendation made:
The report was full of worthy suggestions. What grabbed headlines, though, were its recommendations that cash transactions of over Rs.3 lakh be banned and that nobody should be permitted to hold more than Rs.15 lakh in cash. This is nothing but a cashless economy.
What exactly is a cashless economy?
It can be defined as a situation in which the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer and Real Time Gross Settlement in India.
Benefits of cashless economy:
- Increased efficiency in welfare programmes as money is wired directly into the accounts of recipients.
- Efficiency gains as transaction costs across the economy should also come down.
- Reducing use of cash would also strangulate the grey economy, prevent money laundering and even increase tax compliance, which will ultimately benefit the customers at large.
- Usage of cashless mechanisms would also ensure that loopholes in public systems get plugged, and the intended beneficiaries are able to avail the benefits due to them.
Barriers to cashless transactions:
- Lack of access to banking for a large part of the population as well as cash being the only means available for many.
- An overwhelming majority of retailers, suppliers and service providers belong to the unorganised, informal sector. They have neither the infrastructure to offer card-based transactions nor the inclination to encourage consumers to pay by credit cards or debit cards.
- The perception of consumers also sometimes acts a barrier. The benefit of cashless transactions is not evident to even those who have credit cards. Cash, on the other hand, is perceived to be the fastest way of transacting for 82% of credit card users. It is universally believed that having cash helps you negotiate better.
- Most card and cash users fear that they will be charged more if they use cards. Further, non-users of credit cards are not aware of the benefits of credit cards.
How can the situation be improved?
- By effective implementation of initiatives like Jan Dhan accounts.
- By putting in place robust payments mechanism to settle digital transactions.
- By giving incentives such as a service tax waiver when credit cards or other forms of digital settlements are used.
- The Reserve Bank of India too will have to come to terms with a few issues, from figuring out what digital payments across borders means for its capital controls to how the new modes of payment affect key monetary variables such as the velocity of money.
- RBI will also have to shed some of its conservatism, part of which is because it has often seen itself as the protector of banking interests rather than overall financial development.
- The regulators also need to keep a sharp eye on any potential restrictive practices that banks may indulge in to maintain their current dominance over the lucrative payments business.
While this idea might sound extreme, some developed countries already have similar laws. Belgium, for example, which has the highest proportion of cashless transactions in the world—93%, according to MasterCard—has banned cash payments of over €3,000. And in India, pressure to move away from cash has been building among politicians and regulators.
As cash gets used for fewer and fewer transactions, it will become easier for authorities to crack down on tax evasion. That’s why the government should focus more on enabling this transition than on draconian and hard-to-implement laws that threaten tax evaders with years of hard labour. The best way to eliminate black money is to get rid of the money.