Current Public Administration Magazine (January - 2017) - Tax on Cash Transaction is not a good Idea
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Information & Communication Technology
Tax on Cash Transaction is not a good Idea
A committee of chief ministers has suggested measures that could help the government tide over some of the problems that have dogged it in the aftermath of demonetisation. Ever since the government announced that digitising the economy was one of the impulses behind the demonetisation move, it has been asked difficult questions — and rightly so — on the paucity of digital infrastructure in the country. While the government has never really claimed that the e-payments infrastructure in the country was up to the mark, the CMs’ committee set up to look into ways to migrate people to digital payments has made a significant admission: It has acknowledged that “digital transactions are costlier than cash”.
“We must make the transactions cost-effective and strengthen cloud servers on the bank side,” Andhra Pradesh Chief Minister Chandrababu Naidu, who heads the panel, said after submitting an interim report on digital payments to Prime Minister Narendra Modi. Some of the committee’s recommendations try to address the concerns voiced by small traders after the government announced its intention to digitise the economy. The CM’s panel has suggested that the ministry of electronics and information technology subsidise the purchases of smartphones by small merchants and those outside the income tax bracket. The panel has also recommended tax rebates to incentivise digital transactions.
These incentives come with an unwelcome disincentive. The panel has recommended the reintroduction of the bank cash transaction tax (BCTT). The tax, which was levied on cash withdrawals of over Rs 50,000, was originally introduced in 2005 to keep track of unaccounted money and trace its source, but was withdrawn in 2009. There have been periodic demands to reintroduce the tax. In 2014, the Tax Administration Reforms Committee chaired by Parthasarathi Shome had recommended reinstating the said tax as “an effective administrative measure”.
The government had then rejected the recommendation on grounds that it would hurt the economy. Given that the economy has undergone a shock in the aftermath of demonetisation, re-introducing the BCTT would be ill-advised. Taxing cash transaction will also do more harm than good since, even by the committee’s admission, there is some way to go to make digital transactions economical.
Internet speeds in the country, for instance, are notoriously slow. It would be unfair to expect that digital infrastructure can be created overnight — or even in a few months. The incentives suggested by the committee, however, could spur the migration to a digital economy even while the government works on boosting infrastructure. The ball is now in the finance minister’s court.
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