Demonetisation – dash to a cashless economy?

Over the last few weeks the narrative of the Government of India (GoI) around the November 8 blitzkrieg on black money, has shifted from tackling historic black money to tackling future black money. The stated objective appears to be to march India towards a cashless economy. But, one cannot help but contemplate that this exercise would really need to be a dash to a phone based digital economy rather than a march. The complexity of the problem that confronts large swathes of India warrants that GoI spearhead the cashless initiative on a war footing. The reasons for the ‘demonetisation’ move by the Central Government are still being debated in political circles and news channels. But, one cannot fault the idea or the aspiration to make India a digitally transacting economy. It has numerous benefits which can have cascading effects across the economy on job creation, foreign investment, tax compliance etc.

One of the most significant advantages of a digital economy would be the expansion of the direct and indirect tax base in India. With implementation of GST being inevitable, it would close the loop to ensure that most of India gravitates towards a digital economy for monetary transactions. Subsequent years could witness a significant increase in the direct and indirect tax collection of the Central and State Governments. However, rather than using the stick mostly to ensure compliance, the Government would do well to consider offering the carrot. The statistics for GoI’s tax collection suggests that 89% of India’s tax payers contribute less than 12% of total income taxes and 4.6% of tax payers contribute almost 63% of the personal income taxes. The highly unequal distribution of tax payers suggests serious inequities in wealth distribution coupled with shortcomings in tax laws and compliance. The budget for FY17-18 is a golden opportunity for the GoI to provide an impetus to the digital dream. Significantly simplifying the tax laws, by dropping exemptions and using a graded taxation method (10%, 15%, 20% etc.) for businesses based on net profit would go a long way to incentivize tax compliance. It would dispel the need for businesses to keep transactions off the book to avoid payment of taxes. Depending on the tax collections the Government could each year increase the thresholds for taxation and reduce the rates.

Another useful move that the GoI could use to stem generation of fresh unaccounted income would be to mandate that no tax deductions would be available for payments made in cash. The GoI is putting in place a proposal for industrial labour to be paid wages into their bank accounts. It could extend this principle further and provide that no business can get the benefit of expense deduction under tax laws unless the expense has not been incurred through a banking channel or electronically. Another complementary move would be to allow each individual the benefit of expense deduction to reduce his tax liability provided such expenses were incurred through the banking or electronic channel. This would fuel a consumption boom in the market thereby providing the necessary fillip to various business sector such as real estate, travel and tourism, FMCG, automobiles etc.

The buoyancy provided to the economy by influx of all the existing money into the white economy would make the Indian market and Indian businesses very attractive for foreign capital and investment. Many foreign investors are apprehensive about the opaque practices adopted by Indian businesses in managing their accounts. Shifting the economy to a digital mode would greatly augment the foreign direct investment flows into India for sustained periods. A transparent balance sheet would also make it much easier for businesses to avail credit from banks and financial institutions.

The shift to a digital economy will certainly yield manifold results to the Indian economy in terms of transparency, competitiveness and attractiveness for foreign investments.

(This article is authored by Ajay Joseph – Partner, Lakshmikumaran & Sridharan)