Just days ahead of the Union Budget, a high-powered panel headed by Andhra Pradesh Chief Minister N Chandrababu Naidu on Tuesday recommended imposing tax on cash transactions of at least Rs 50,000 through banks to discourage the excessive use of cash and promote digital payments.
“To curb use of cash for large transactions, the ministry of finance should consider levy of banking cash transaction tax (BCTT) on transactions of Rs 50,000 and above,” the panel, constituted by Prime Minister Narendra Modi in November after demonetisation, said in its interim report.
“We have submitted the recommendations to the Prime Minister today (Tuesday) and are fairly confident that some of these might be incorporated in the 2017-18 Union Budget,” Naidu later told reporters.
The panel wants the Reserve Bank of India (RBI) and the finance ministry to not allow cash transactions above a threshold.
However, some experts said that existing measures to curb high-value cash transactions were good enough and a fresh tax was not needed.
“It won’t be a good move as the existing measures like mandatory quoting of permanent account number (PAN) and tax collected at source (TCS) for sale and purchase of goods and services for over Rs 2 lakh in cash are enough,” Amit Maheshwari, partner of tax firm Ashok Maheshwary & Associates, told Business Standard.
The erstwhile BCTT, imposed by then Finance Minister P Chidambaram, was effective from June 1, 2005, but ceased to exist on April 1, 2009, on the grounds that the tax department had many other instruments to nab those having black money, making the tax redundant.
BCTT was imposed at 0.1 per cent of the cash withdrawal other than from savings accounts. It was imposed on any individual or Hindu undivided family withdrawing Rs 50,000 or an entity taking out Rs 1,00,000 in cash.
Heading the Tax Administration Reform Commission, Parthasarathi Shome, the brain behind BCTT, advocated the tax be restored because there was no other instrument present to capture the information provided by the tax.
The Naidu panel recommended providing a subsidy of Rs 1,000 to all non-income tax assessees or small merchants for purchasing smart-phones.
The committee favoured waiving the merchant discount rates (MDRs) on all Aadhaar-enabled payments and low or zero rates for all digital payments made to government Budget 2017-2018 entities such as buying railway tickets and paying state-run insurance companies premia.
The rates are charged to a merchant by a bank for providing debit- and credit-card services.
The panel included Madhya Pradesh Chief Minister Shivraj Singh Chouhan, Maharashtra Chief Minister Devendra Fadnavis and Odisha Chief Minister Naveen Patnaik.
The committee suggested lowering MDR for other modes of cashless transactions such as those on debit and credit cards and the proposal has been sent to the RBI.
It said merchants who accepted digital payments should get relief in prospective taxes and no retrospective taxes should be levied on them.
The panel also favoured tax refund for consumers using digital payment up to a certain proportion of their annual income and a 50 per cent subsidy on all Aadhaar-based payment devices, biometric sensors to merchants to promote the usage of such devices.
Tax relief should also be extended to micro ATMs, biometric sensors, etc, to encourage domestic production. Currently, most such devices are manufactured outside India.
India, with just 1,080 pay-points per million people as compared to more than 16,000 in China and over 31,000 in Singapore, is one of the least digitised economies in the world.
The panel said, among other things, attitudinal factors, infrastructure, data connectivity, cyber security and the higher cost of digital transactions as compared to cash transactions were some major constraints in promoting a digital economy in the country.
It also advised the government to create a fund from the savings through cashless transactions for incentivising bank acceptance infrastructure in semi-urban and rural areas and all government services such as insurance, educational institutes, PDS and petroleum should mandatorily switch to digital modes of payment.
If accepted, the measures will be another series of steps to promote digital payments after the finance ministry had announced last month a number of incentives and discounts on fuel, highway tolls, railway tickets and insurance cover. Naidu also suggested there should be legislation to accommodate digital transactions and ensure their security.
Top 10 recommendations:
– Levy a banking transaction tax on cash transactions of Rs 50,000 and above to curb cash use
– A cap on maximum permissible limit of cash component in big transactions
– Provide a subsidy of Rs 1,000 to purchase smartphones to all non-income tax assessees or small merchants
– No retro tax on merchants doing digital transactions and relief from prospective taxes
– Tax refund for consumers using digital payments up to a certain proportion of their annual income
– All merchant points to be given 50% subsidy for purchasing Aadhaar-based payment methods
– No merchant discount rates (MDRs) on transactions done through Aadhaar-based payment systems
– Lowering of MDRs and making it zero for digital payments to government entities
– Major government functions such as public distribution systems should switch to digital payment modes
– Aadhaar should be made a mandatory ID for KYC, for which amendment to money-laundering law is required