Tax on cash a bad idea PDF Print E-mail
Friday, 27 January 2017 00:26
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Ishaan's edit

If bank accounts Aadaar-linked, can track cash anyway


The chief ministers’ panel on digital transactions headed by N Chandrababu Naidu appears to have got it right when, for instance, it recommends transactions should be inter-operable and Aadhaar should be made the primary ID for know-your-customer (KYC) norms. It is not immediately obvious, though, why the panel has suggested the government should be subsidizing mobile phones for non-income-tax assessees since the idea of AadhaarPay is to allow even those without mobile phones to make digital payments – in the case of AadhaarPay, the merchant will have a fingerprint scanner attached to his/her smartphone and users will simply use the scanner to authorize a payment from their bank accounts. Recommending scrapping of commissions paid by merchants using credit/debit cards is a rank bad idea since, were this commission to be scrapped, there will be no incentive for banks to roll out a network of Point of Sale (PoS) machines to read debit/credit cards – since the commission is an irritant and could drive merchants back to accepting only cash, a more rational solution is to get the government to pay the commission since, as the economy gets more formal, the government will benefit by way of higher tax collections.


The suggestion on putting a tax on cash withdrawals from banks above a certain value is also a poor idea though, ostensibly, it is to discourage the use of cash. Since those using cash to avoid paying income tax would end up paying at least a 10% tax were they to disclose their incomes to the taxman, it will be cheaper to pay the banking tax and withdraw cash for making payments. This could be fixed by raising the cash-tax but if this is raised too much, this will be disastrous since the tax is a cascading one; in an economy where there are various (legal) reasons for preferring cash, raising costs is a bad idea.


More important, there is a relatively painless way to achieve the same objective. Once all bank accounts are linked to an Aadhaar number, it will be possible for the taxman to have details of all cash withdrawals, even if these are make from various bank accounts and even if individual transactions are broken up into small lots to avert suspicion. Once the taxman has details of people who have, say, withdrawn more than Rs 10 lakh in a year in cash, he can then ask for details of where the money was spent. Putting a tax on cash also has poor optics since it will appear the government is not even allowing people to spend their own money without taxing them. 


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