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Last Updated : Jan 18, 2017 08:17 PM IST | Source: Moneycontrol.com

Budget 2017: Golden opportunity to lay roadmap for cashless economy

Measures such as the recently announced concessional tax rate of 6% as opposed to the present rate of presumptive taxation of 8% for income received through banking and digital business by small businesses is a welcome move.

Naveen Aggarwal

The year 2016 has probably placed India as an ‘early innovator’ as far as unprecedented executive reforms are concerned. The sole credit for this rests with the government’s move of demonetizing high value currency, which probably changed the life of every Indian as it was announced. The objectives were made crystal clear and pointed towards flushing out the black money economy, tackle the growing counterfeit currency market and move towards a sustainable cashless economy. While the jury is still out on the real impact, the move continues to evoke polarizing opinions in public discourse, the predominant narrative of the government now is that of creating a push towards a ‘less cash economy’.

The past two months has seen the government actively undertake course correction measures on a real-time basis leading to continuous tweaking of guidelines and frequent amendments to existing income tax laws. Testimony to the fact is that the government on some level was itself in a ’learn as you move along’ phase, which probably holds true even today. With the Union Budget 2017 only weeks away, what remains to be seen is how the current government navigates the economic challenges in the background of the recent demonetization and carry forward the reforms agenda to leverage opportunities, which some would say has been the hallmark of some of its previous Budgets.

In the backdrop of a liquidity crunch and fuelling speculations of a short-term economic slowdown, one doesn’t need an expert’s view to ascertain that the government, through this Budget, is likely to focus on instilling life back into consumerism and reinvigorate the industrial growth process through a revival of public spending. Taking cue from the mood that the Prime Minister (PM) set through his speech on December 31, rural/semi-rural and essentially the agrarian sectors of the economy are expected to receive front row seats on the reforms agenda and therefore schemes such as the ‘Pradhan Mantri Awas Yojana’ and ‘Garib Kalyan Yojana’ would certainly draw a lot of focus. On the other end, given that the government coffers are brimmed up, there is expectation that a series of steps would be undertaken to fuel industrial activity and infrastructure growth. Sectors such as Real Estate, Fast Moving Consumer Goods (FMCG), Automobiles and Auto Components that have been hit hard due to the cash crunch are expected to receive some breather through the budget so as to propel growth. For e.g. first time home buyers may expect good news from the budget via higher tax savings on housing loans and house insurance premiums. Low cost affordable housing could also get another boost in line with the government’s social spending push.

While the current blanket restrictions on cash withdrawals are expected to ease eventually, in order to bring buoyancy in the retail sector, promotion of digital payments supported by greater disposable income in the hands of buyers is crucial. The upcoming Budget also presents a perfect opportunity to push the agenda of a ‘less-cash’ economy. India’s cash to GDP ratio, an indicator of the amount of cash used in an economy, is estimated to be around 11%, which is significantly higher than major markets such as the U.S. and U.K. as well as other comparable emerging economies. Higher circulation of currency is a key factor in stoking the parallel economy as it makes hoarding of cash easy. Measures to increase adoption of digital payment mechanisms such as debit, credit cards and e- wallets as well as a reduction in their cost of transaction can go a long way in bringing most transactions within the formal economy. There is also scope here for improving some operational hurdles while looking at incentives to push for digital payment mechanisms where sustainability needs to reign supreme.

Measures such as the recently announced concessional tax rate of 6% as opposed to the present rate of presumptive taxation of 8% for income received through banking and digital business by small businesses is a welcome move. Extending the timeline for waiver of service tax on card transactions can also be considered. However, if transacting through digital mediums are to become the norm rather than an exception, sustainable investment and growth of the supporting infrastructure is crucial, especially to ensure that the rural and unorganized economy is not left out. With the government pushing the ‘Jan Dhan Yojana’ and small businesses and traders contributing to almost 45% of the GDP, uniform development of card acceptance infrastructure is also necessary to bring about this change. To meet this objective, the Budget may introduce measures which promote market participation in building digital payment systems, manufacturing incentives for mobile P.o.S, devices etc. and further incentivize Fintech companies looking to make an impact on the overall digital payments ecosystem.

Finally, demonetization is also likely to impact how the government looks at tax rates in the upcoming budget. While the Finance Minister has already laid out the fiscal consolidation roadmap in its previous budget for corporates with a gradual reduction of tax rates and withdrawal of exemptions and deductions, expectations are rife that the public at large may also get some relief. This would positively impact savings and possibly fuel consumption. Keeping in mind the vowed objective of a ‘less cash economy’ a lowering of tax rates will also lay the groundwork for increased voluntary tax compliance.

As the nation awaits an unprecedented Budget, both in terms of its timing as well as the departure from its earlier form, it presents a golden opportunity to lay the structural roadmap for a ‘cash-less’ economy. If the government is able to strike the right balance between offsetting the perceived short-term slowdown in economic activity and introducing measures targeted at building a robust digital banking infrastructure, this budget may well make demonetization look like a ’blessing in disguise’.

The author is Partner and COO – Tax of KPMG in India

All views and opinions expressed herein are those of the author and do not necessarily represent the views of KPMG in India
First Published on Jan 17, 2017 02:08 pm