Cashless Economy (Notes for UPSC mains)

Cashless Economy

What is the news: In a bid to promote cashless transactions, the Union government on July 5 said businesses with annual turnover of over Rs 50 crore can offer low-cost digital modes of payments and no charges or Merchant Discount Rate (MDR) will be imposed on them or their customers.

Cashless Economy: A cashless economy is one in which the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer and Real Time Gross Settlement in India.

Indian scenario:
➡️India uses too much cash for transactions. The ratio of cash to gross domestic product is one of the highest in the world—12.42% in 2014, compared with 9.47% in China or 4% in Brazil. Less than 5% of all payments happen electronically.
➡️Merchant Discount Rate (MDR) is a charge levied for facilitating a digital transaction and is generally distributed among various parties.
➡️In the recent budget, apart from removing the imposition of Merchant Discount Rate (MDR) on businesses with annual turnover of over Rs 50 crore, a two per cent tax deducted at source (TDS) will also be levied on cash withdrawals exceeding Rs 1 crore in a year from a bank account to discourage the practice of making business payments in cash.
➡️The Reserve Bank of India (RBI) and other scheduled commercial banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to digital modes of payment.
➡️There are several low-cost digital modes of payment available such as BHIM UPI, UPI-QR Code, Aadhaar Pay, certain debit cards, NEFT and RTGS that can be used to promote less-cash economy.
➡️Necessary amendments are being made in the Income Tax Act and the Payments and Settlement Systems Act, 2007 to give effect to these provisions.

Benefits of a cashless economy:
➡️A Moody’s report pegged the impact of transactions to 0.8% increase in GDP for emerging markets and 0.3% increase for developed markets because increased velocity of money.
➡️Cashless economy sees reduced instances of tax avoidance because it is financial institutions based economy where transaction trails are left. It also helps curb the generation of black money.