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The Govt’s Proposed Measures to Curtail Cash in The Economy are Doomed to Failure

For establishing the source of transactions, we would be better-off nudging and incentivising instead of mandating non-cash transactions and penalising cash transactions.

Cash is the preferred medium employed by unscrupulous elements to settle malicious transactions. The reason being, transactions settled with cash are like footsteps of fish – they do not leave a trail. If settlement is through non-cash means, malicious transactions can be trailed and their perpetrators, trialed. With this intent, the government has been bringing in a slew of measures to promote non-cash settlement modes and to penalise cash transactions. To cite a few – 2% lower presumptive profits for transactions settled through non-cash means, penalty on cash receipts in excess of Rs. 0.2 Million, disallowance of expenditure in excess of Rs. 10,000 etc.

Some mature economies have indeed been successful in eliminating cash transactions. But this might not be possible in the Indian scenario because of her population and large informal economy. Hence, instead of aiming at a zero cash economy, the government has rightly aimed at a “less cash” economy. Towards this goal, this year’s interim budget has proposed certain amendments and two new measures.

People waiting in queue to exchange demonetised notes

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The proposed amendments give recognition to electronic payment modes, which was hitherto, surprisingly missing. These amendments now treat prescribed electronic payment modes at par with payment through account payee cheques, drafts, NEFT and RTGS. With the rapidly changing digital economy environment, these amendments are most welcome. Thus, payments made through electronic modes will henceforth be treated as non-cash payments.

The two new measures are — introduction of withholding of tax for cash withdrawals and requiring businesses to embrace digital means for getting their payments settled. While the intent of these proposals is noteworthy, one wonders whether these proposals are worthy enough to curb dirty notes.

Cashless economy
(Photo: Facebook)

The withholding proposal would indeed create a trail. But, isn’t the annual threshold of Rs.10 million too high? Because of the high threshold, a malafide person can easily circumvent it by ensuring that aggregated withdrawal(s) from no single bank exceeds Rs.10 Million. Further, is the additional trail really needed? Are not the core banking software currently employed by banks already capable of aggregating and reporting to the income tax department, cash withdrawals made by a single customer? Is the incremental benefit from this proposal commensurate to the additional compliance burden on the already overloaded banking system?

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The second proposal targets businesses having annual turnover of Rs 500 Million or more. This proposal requires such businesses to offer an additional electronic mode to its payees for accepting receipts. This is in addition to the existing electronic payment modes. If a business having annual turnover in excess of Rs 500 Million fails to offer this, it is liable to pay a penalty of Rs. 5000 per day. To promote this electronic payment mode, no bank or intermediary would be allowed to charge any fee for providing such facility to the businesses. A holistic provision indeed. However, this will not prevent a payee from disregarding the electronic payment mode being offered, and continue to make the payment in cash. Further, with no pecuniary benefit, would banks and intermediaries whole heartedly support it? As per a recent survey, if the transaction charges are removed, Oil Marketing Companies would save as much as Rs. 5000 Million annually — a consequent equivalent loss to banks and financial intermediaries. Are banks and financial intermediaries ready to take this hit? Additionally, the costs incurred for setting up and maintaining this additional electronic payment mode will put pressure on the businesses. A more realistic approach would be which has been proposed under the GST whereby, the prescribed class of registered persons is required to offer its customers an option to make the payment through electronic mode without any penal provisions.

cashless economy
Electronics and IT minister Ravi Shankar Prasad briefing the media on the initiatives taken for popularising cashless transactions, in New Delhi on December 16, 2016.

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As stated earlier, the problem with cash transaction is not the transaction itself but the absence of trail. Hence, instead of stressing more on preventing cash transactions, the Government would be better-off ensuring trails for cash transactions. One step in this regard would be making it mandatory for banks to capture the PAN/Aadhaar of any third party depositing cash in excess of a reasonable limit (say Rs. 10,000 per day). This would help establish the missing trail.

To summarise, for establishing the source of transactions, we would be better-off nudging and incentivizing rather than mandating non-cash transactions and penalizing cash transactions. These crude but effective pebbles might equip Hansel and Gretel to reach their destination, rather than the polished but worthless bread crumbs leading to painful detours.

Uttam Padival is a Mysuru based chartered accountant.

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