Tax move on transactions wrong

A committee of chief ministers headed by Andhra Pradesh Chief Minister Chandrababu Naidu has made some recommendations to promote cashless payments and to get over the difficulties that have arisen in the wake of demonetisation of high-value notes. Weeks after the demonetisation decision, the government had changed its declared aim from eliminating black money to promoting a cashless economy. This was when it became clear that the original purpose had been lost. The Naidu committee was set up in that context, but its recommendations may not help to improve the situation. Some of them may actually exacerbate the difficulties. It has been reported that some recommendations may be considered in the Union Budget. They include suggestions to impose a bank transaction tax on cash withdrawals above Rs 50,000, to subsidise mobile phones for those who do not pay income tax and to scrap the commissions paid by merchants using credit or debit cards. All the proposals are defective in some way or the other.

A tax on transactions above Rs 50,000 is a bad idea because it penalises a legitimate financial activity for uncertain results. A similar tax was introduced some years ago but was withdrawn in 2009 as it was found ineffective. Then also the aim was to track black money. All transactions can be tracked now if bank accounts are linked to the Aadhaar number and PAN. If a tax is to be paid, ingenious ways will be found to evade it, beating its aim and increasing the load on banks. Coercive methods will not help to change habits and shift financial practices which are basically not wrong. Everybody has the right to withdraw any amount from his bank in whichever way he likes. The freedom of the customer, his idea of cash security and even privacy are involved in this. Millions of honest people should not be made to pay for the refusal of some to pay tax and the inability of the government to catch them. The idea is similar to demonetisation which too penalised the majority, making false claims which turned out to be wrong.

The need for a subsidy on mobile phones is not clear. The scrapping of merchant commission may lead to difficulties. Banks will not be ready to bear the transaction cost if no commission is paid. The committee has admitted that “digital transactions are costlier than cash.” So it is not right to push people into the digital economy through penalties. The infrastructure for that is not in place and the right environment is lacking. These issues should be addressed first. A penalty-based approach will only be counter-productive.

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