CASHLESS AND NOT TAXLESS ECONOMY

Recently many people have been suggesting radical ways to reform the Indian economy. A famous babaji ("Yoga Guru") has suggested doing away with all taxes except a flat 2% transaction tax on all bank transaction. He has also suggested to withdraw all 1000 and 500 rupee notes and demonetize them. In his defense he is not an economist and this idea is pushed by many think tanks and economists too.

But even a superficial examination will reveal that this will be extremely regressive step. Many point can be put forth:

1.Most of the Indians have no access to formal credit and banking services, so the transaction tax may not be such a good idea as sufficient revenue will not be generated(figures are available but I am not going into that here)

2.It will push money out of banking system into informal economy also known as black market as there will be a disincentive in having money in banks.

3.Although there will be only one tax("Transaction tax") and other taxes gone this will seemingly make tax assessment easy and improve tax return(as allegedly, there will be no complexity in finding out one's tax liability).But it can also be argued that, now as opposed to earlier, one has to skip only one tax and the whole money is gone(in the black economy).

4.Its patently unjust and iniquitous as the rich and poor will have to pay the same rate of tax and the rich will  end up paying much lesser tax relative to income. The middle class will be worst hit.

There are many more flaws but the followers of a particular political economic  ideology will keep making noise in favour of this ridiculous idea.

                                                                I on the other hand propose something different, although I don't lay any claim to its originality the idea must still be propagated so that a more informed discussion can take place.I propose to move toward a cashless society with the current tax structure intact(perhaps with a little decrease in tax rates so that compliance and resultant revenue increases, refer Laffer curve)

WHY CASHLESS

In a cashless society transactions take place using only bank instruments (debit/credit cards, demand drafts, cheques etc). Also cash cards /prepaid cards can be used ( but to recharge/pay for them you will have to use bank instruments). And finally e-payment modes (net-banking etc) which can be thought to be an extension of banking instruments. Bitcoins are not allowed due to their abuse potential(money laundering, anonymity of user, hawala etc)

As every transaction is done through banks:

1. Every single paisa can be traced to its origin.

2. It will lead to more use of banking facilities thus strengthening of banks which can then take a greater part in the local and global economy.

3. Curbing black economy and stopping black money generation to a large extent.

4.Tracking every transaction in the economy thus putting an end to sale of illegal items (atleast to some extent) like drugs, country guns to items like Shahtoosh shawls, ivory and Javan monkeys!

5. Formalization of economy and growth of credit as banks will have more "money" with them.

6. Subsidy targeting will be more focussed  as cash is not being used(although this has started under thr the DBT scheme)

7. Investment in more productive assets  than gold and land.

8. Greater financialization and integration with global economy(this however can be a double edged sword and requires fine regulation)

HOW CAN IT BE DONE & PRECONDITIONS FOR A CASHLESS SOCIETY

I realize cashless-ness will not be easy to implement. So the whole thing must be done in phases and some preconditions need to be there . That is:

1.Making it illegal to transact over a certain limit using cash

(I suggest 2000 Rupees because this won't hurt the daily wagers, small shopkeepers, street vendors etc as their individual daily business transaction rarely crosses 500 rupees as of today). Babaji had also suggested this so this is probably our point of convergence.

Doing this will ensure that all transaction except the bare essential and small ones  will come under the govt scanner. If need be a person will be able to show a record for every paisa earned and spent (assuming s/he wants to).

As each paisa spent over this limit is tracked tax evasion will become difficult (even if one has "earned" the money dubiously, because when one has to spend this dirty money one has to go to the clean establishments i.e. restaurants, car showrooms, jewellers, designer couture etc  and to protect their own skin these establishments won't accept cash because then the liability shift to them).

This leaves the "dirty" establishments- those willing to accept a cash or whose products are such that they help in money laundering(e.g a bike store owner in Karol Bagh who charges 1500 Rupees for a 50 rupee tail reflector) this is dealt with later in the article.

2.Demonitization of 500 and 1000 rupee notes after a set date.

As it becomes difficult to physically carry money alternate sources will be sought and this is where the bank instruments come into picture. Although it will not 100% curb the tendency to pay black money cash, it will certainly make it very cumbersome and prone to detection.

3 Financial inclusion

It means giving access to banks to the millions who don't have bank accounts. This is the most daunting and complex step. However some beginning has already been made in the form of UEBA(universal electronic banking account number). An idea generated by the Nachiket Mor committee of RBI, it involves giving a UEBA to the unbanked people on the basis of UID(Aadhar) and making it illegal to deny opening a bank account if UID is produced as a form of identification(a deplorable practice rampant now).

However this would also require integration of NPR and UID data de-duplication and giving UID a statutory status. Steps which are not impossible and require but just a little political nudge.

4 POS (Point of sale )machines to be made more popular and the cheaper.

Already in place and going on

5 Reducing card transaction charges.

This can be done by using a domestic payment gateway like RUPAY instead of visa and mastercard which have higher transaction charges.Thus making card payment acceptable to all i.e. merchant customer and the bank

CHALLENGES

Even after following these steps some more may be required but demonitization of high end notes and cash spending limit are essential. However many challenges may be posed in the implementation.

First, the mere demonitization will not deter black money generation. Black money is that income on which tax is not paid that is why any formal financial instrument or mechanism can't be used with it. This money is used mostly of consumptive spending(jewels, expensive art, food expensive accessories cars etc). And even though most(and with time many) establishments and shops will insist on non cash payment to comply with the law, some dishonest people will still want to push cash for high purchases. This is where a couple of our laws come in handy. The PMLA(Prevention of Money Laundering Act), various IT acts, IPC, the PCA(Prevention of corruption Act).

Why should we assume that these acts which are so lackadaisically applied now will become tougher, let me explain how.

Imagine a dishonest shopkeeper(s/he could be in any part of the country urban or rural and be engaging in any activity i.e. sale of service or goods) for the sake of this example let's assume s/he is grocer. So this person makes a sale above Rupees 2000 and tells the customer he s/he will waive some amount if the customer pays in cash(even though the statutory limit of 2000 is breached).Now this is practice is not unheard of and shopkeepers rarely give you a bill which means all that money is untaxed as its not accounted for. So by avoiding  a small tax  the shopkeeper converts the entire sum into black money and stashes it in the form cash or gold or real estate purchase.

The difference now will be that on one side the customer will insist on a bill because in its absence his/her purchase(whether it's a can of ghee or a laptop) will become illegally obtained and he can be prosecuted under money laundering act. On the other side  one will be willing to accept the shopkeeper's cash because of the same reason. So we have a situation where a dishonest person has money but no avenue to spend it.

Also using  cash to buy gold and/or real estate is not possible because these items easily cross the 2000Rupee barrier and naturally every sale has to be through cashless means.

Money laundering and stashing it abroad, though not impossible, will become difficult as(now this is important and purely contingent on the govt) now the govt will be expecting a rise in money flow in economy and will be more alert and (hopefully) conduct more seizures and raids. It's simple logic, if few people do a particular crime fewer get caught but if more do the same crime many more are captured. So if we change the perception of the severity of the same crime , it will get  more prompt punishment.

To explain further take this example: Compared to the no. of people on at any given time very few indulge in drunken driving or DUI(driving under influence). Compare this no. with the people spitting on the road or jaywalking or any such "minor" offence. Now if the perception of crime change(as matter of policy not in the people, because that takes time and is difficult to achieve) and jaywalking/spitting on road is equated to DUI it will be a cake to apprehend any no. of offenders and penalize them.This serves as warning for other and slowly leads to change in action and behavior.

What I mean is the money laundering is a criminal offence with much stricter punishment and very low govt tolerance for it  compared to tax evasion which is a civil offence and people can get out by paying a small fine. So a shopkeeper or any individual who would have earlier paid a small bribe or a mediocre fine to get away from charge of tax evasion will now either have to pay a huge bribe or go to jail for a criminal offence both of which are strong deterrents.

Also as the risk of detection increases and people are caught (govt here needs to make an example out of those who are caught by giving swift and exemplary punishment) it will act as huge social deterrent.

Nowhere am I assuming that  there will be some change in the ethics and morality of the people in general and law enforcers in particular. My attempt is to just convert a hitherto "benign" offence to a more grave one thus ensuring greater compliance.

The counter point raised here is that it will need an army of inspectors to see who is paying in cash. It's an exaggeration as most daily essential transactions will still be in cash and under limit me transactions need not be covered. The govt will be more than happy to have more law enforcers of that sort (IT sleuths, EOW officers SFIO officers) to net the big fish as the expenditure incurred on such officers will be more than compensated by the revenues they bring in.

It all sounds very Machiavellian because he believed that humans are intrinsically dishonest and fearful. Two tendencies which we exploit here. If there is a threat of a swift and severe punishment people resort to not doing the said activity, not from some inner belief in goodness but sheer selfishness and fear. The behaviour then percolates and gets established in society. Imagine the Danish as Vikings and how they are today.

DISCLAIMER: Article was written in a hurry as a result some grammatical mistakes may be there.

Also this article is in the nature of a general idea and a more nuanced debate is welcome with other experts.