The government is in discussions with the Reserve Bank of India (RBI) to allow more free ATM transactions, so we hear. The thought does have merit, since withdrawing money from an ATM costs banks less than encashment at the bank branch. But it is about time a real comparison was made of debit card usage at ATMs and in electronic transactions and direct policy moves suitably.
In other words, would it not be more cost-effective if the same card is used to go cashless? You’ll find that the gains go beyond saving the mere Rs. 20 it costs the bank when you draw money from an ATM. In real terms, this would help reduce the flow of cash into the economy. For, quite possibly, stacks and stacks of those currency notes that today constitute black money may well have originated from perfectly legitimate transactions made by honest taxpayers themselves! If only these payments were made in cashless form, they would have been automatically accounted for and would have also beefed up the government coffers in multiple ways — with additional sales tax, service tax and other forms of tax collections.
Incentivising cashless transactionsNow, how do you nudge the honest taxpayer into putting his debit card to effective use for the larger good? And what about the trader who sells grocery and other products — will he play along?
Under the current scheme of things, the seller of goods obviously has a lot to lose by accepting the debit card. For one, he stands to pay a merchant discount rate (varying from 0.75 per cent to 1 per cent), and this eats directly into his margin. More importantly, he also knows every such transaction is accounted for and, therefore, liable to be taxed. Suppose a sales tax concession is offered for such point-of-sale payments to go electronic as has been suggested in some quarters. Even then the shopkeeper would not be motivated — he’d much rather save the entire tax than claim a small indirect tax rebate for supporting the cashless drive.
What, then, is the answer? Perhaps it lies in giving a small incentive to the taxpayer to use his card or mobile. A carrot to the honest. For example, the government could grant a 5 per cent income tax rebate for taxpayers who make more than 85 per cent of their payments in cashless mode. The required percentage of cashless transactions for rebate eligibility could be even higher for very high income groups. A routine bank statement/certificate stating percentage of cash debits separately should suffice to claim the rebate. Personal banking statements are already being used to show interest income accrued and tax payable/deducted, so administering such incentive would involve no extra burden either on the banks or the taxpayer.
On balance, a net gainThat brings us to the question of loss to the exchequer. Let’s do the maths. As per Department of Revenue’s website, Rs. 1.71 lakh crore was collected as personal income tax in 2011-12, registering an average compound annual growth rate of 14.81 per cent for the period between 2006-07 and 2011-12. Applying the same growth rate, the estimated collection in 2015-16 would be Rs. 2.96 lakh crore. Assuming that the government chooses to pay 5 per cent rebate and 25 per cent of taxpayers qualify, the payout is still only Rs. 3,700 crore. Based on published studies and reports, the total cost for ATM operations is roughly around Rs. 18,000 crore. Even if this shift to cashless transactions were to reduce ATM transactions by just 25 per cent, it would still save the banking sector around Rs. 4,500 crore in ATM costs alone. And if we were to top up these savings with a hugely conservative estimate of 1 per cent resultant increase in sales tax/value-added tax revenues across States, that would be another Rs. 4,400-plus crore. Need there be a more compelling pitch for the tax rebate?
Revenue-wary policymakers can fine-tune eligibility percentages and the percentage of rebates to play it really safe. Since the rebate has to be earned over a year, the human tendency would be for taxpayers to switch to cashless transactions as a matter of habit. And merchants who hesitate to honour a card will find themselves being pushed to do so.
Hopefully, savings in ATM subsidies for the relatively affluent could get suitably channelled to give adequate incentives for establishing an operating infrastructure in rural areas for accepting electronic payments and providing cash-out facilities. Virtually all households have a bank account, and a big chunk of them have a RuPay card too. What is the whole point of pumping out direct benefits to the newly opened bank accounts if it can’t be converted into purchasing power in the hands of the poor?
Income tax rebate for cashless transactions could well trigger a series of coordinated policy tweaks that could help boost revenues for the government, productivity for the economy and an effective infrastructure for direct benefit transfers and financial inclusion.
(Krishnan Dharmarajan is Executive Director, Centre for Digital Financial Inclusion at the Institute for Financial Management and Research. Views expressed are personal.)
