Andhra Pradesh Chief Minister, Chandrababu Naidu heads a panel of chief ministers to promote digital payments. (Photograph: Dhiraj Singh/Bloomberg)

Digital Payments Panel Calls For Tax On Large Cash Transactions

A government appointed panel on digital payments has recommended a slew of measures to incentivise digital payments while also calling for a tax on large cash transactions.

The 13-member committee of chief ministers headed by Andhra Pradesh chief minister Chandrababu Naidu, has asked that a banking cash transaction tax be levied on transactions above Rs 50,000. The committee has also called for a cap on the proportion of cash that is allowed to be used in large-ticket transactions.

To curb use of cash for large transactions consider levy of banking cash transaction Tax (BCTT) on transactions of Rs 50,000 & above. 
Committee Recommendations

The committee was constituted by the government in November and was tasked with recommending ways to move the Indian economy towards one which is based primarily on digital payments. According to a 2015 report by PwC, 98 percent of all transactions by volume in India happen in cash. 68 percent of the total value of transactions are conducted in cash, said the report.

The committee’s recommendation for a cash transaction tax is in-line with a similar suggestion made by another government appointed committee. A panel headed by former finance secretary Ratan Watal, which had also been tasked with finding ways to incentivise digital transcations, had also advocated a nominal charge on high value transactions when it submitted its report in December.

The concept has been tried in the past. The banking cash transaction tax was first introduced in 2005 at 0.1 percent on cash withdrawals over Rs 50,000 by individuals from their savings bank accounts. It was scrapped in 2009 by the then United Progressive Alliance government.

Scrap Merchant Discount Rate?

The committee has recommended the scrapping of the merchant discount rate (MDR), that is the transaction charges paid on debit or credit card transactions.

The presentation made by the committee suggests that MDR on digital payments to government agencies be done away with. Aadhaar enabled payment systems (AEPS) should also be promoted by not charging MDR, it said.

During the press conference, however, Naidu suggested that he was in favor of abolishing MDR completely. The downside of this would be a lack of incentive for payment industry participants to push greater penetration of debit and credit cards. Keeping that in mind, the Watal committee had said that the MDR should be market determined.

MDR should be abolished completely... I hope the changes recommended by the committee are incorporated in the upcoming budget.  
Chandrababu Naidu, Chief Minister, Andhra Pradesh

Following the government’s decision to withdraw Rs 500 and Rs 1,000 notes, banks had withdrawn MDR till the end of December at the request of the government. On December 17, the Reserve Bank of India brought down the cap on MDR to 0.25 percent for all transactions below Rs 1,000 and 0.5 percent for those between Rs 1,000-2,000 till March 31, 2017. Before that, MDR was in the range of 0.75-1 percent.

Tax Incentives To Adopt Digital Payments

The committee has also recommended that tax incentives be provided to push small merchants to adopt digital payments.

There should be “relief in prospective taxes for encouraging merchants to accept digital payments and no retrospective taxation to merchants doing digital transactions,” said the committee’s presentation. It added that a tax refund could be offered to consumers using digital payment upto a certain proportion of annual income. Further, the committee said that the government can consider offering a subsidy of Rs 1000 to small merchants to encourage them to adopt smart phones, which can then be used for digital payments.

As a way to expand the access to digital payments, the committee said that interoperable Aadhaar enabled Micro-ATMs be provided across 1.54 lakh post offices. Rural and urban cooperative banks should also be encouraged to adopt digital payments immediately.

To improve the availability of digital payment infrastructure, the committee recommends that tax incentives to be extended to manufacturers of micro-ATMs, and biometric sensors.