Demonetisation, a forced behavioural change for the better

Human beings favour the status quo. Bringing about any behavioural change in society takes lot of time, may be a generation, unless it is pushed through without much choice. Traditionally, in India, people have been accustomed to use of the cash for their daily requirements. ‘Cash has been the king’, particularly in rural areas where a large section of the population does not have access to formal financial or banking channels. Though the situation has improved, with the opening of Jan Dhan Accounts and various financial intermediaries catering to diverse needs like micro-finance lending institutions and payment banks, farm workers, daily labourers and small vendors are outside the ambit of these systems.

The current demonetisation, is on an unprecedented scale, without many parallels in recent financial history. Besides being an attempt to curtail black economy and achieve other larger socio-economic objectives, it aims at making a behavioural shift in the society — making it a ‘less-cash’ society, before finally transiting to a ‘cash-less’ economy.

The ‘fear factor’ and the ‘inconvenience’ of large scale demonetisation and its after effects, such as penal action by tax and other regulatory authorities, will have a long lasting impact on a large section of the population. In general, people who have easy access to non-cash modes, like debit and credit cards, e-wallets, are likely to keep less cash with them and increasingly adopt these new modes of payment.

As consumers start insisting on payment by alternate modes non-cash transactions, vendors will be forced to change and adapt newer methods for business transactions. Recently, many taxi services in the country have started accepting e-wallet payments, and there is significant rise in demand for point of sale debit/credit machines from vendors, who have traditionally been accepting cash payments. Therefore, eventually a large number of businesses will eventually be a part of the digital world, either fully or partially, thereby adding to the tax base.

The difficult change will be in the rural and semi-urban areas, where access to formal financial channels coupled with low internet penetration is still a challenge, though it is improving with each passing day. This transition will take some more time and cash is likely to continue to rule the local markets, though with a significant dent, as people will remember the inconvenience associated with any other possible demonetisation, decreased availability of cash in the system and other associated issues.

Demonetisation, could be said to be a pre-cursor to the GST regime on the anvil. At present, there are revenue leakages in the system due to various reasons like cash sales without invoices, under invoicing. These practices are likely to receive a severe blow under the GST regime, as information about the whole supply chain, tax paid and credit availed will be available online.

Thus, unless the whole supply chain runs on cash, right from the origin to final sale, it is likely to come under scrutiny as the system will show up discrepancies. This per se, is likely to push more and more businesses to be part of the formal economy, thereby leading to increased tax compliance.

One of the primary reasons for people falling out of the tax net and embracing cash transactions has been the high tax rates in the past, coupled with difficulty in compliance, and fear and hardship of dealing with tax/other authorities. As most of these points are being addressed, though gradually, more and more businesses would like to change and follow the rule of the land. Interestingly, newer businesses including start-ups especially those funded by venture capitalists, private equity, invariably put lot of thrust on compliances, thereby, adding to the overall tax base.

The recent proposed changes in the tax law announced by the government, under which cash deposits without explainable source could ‘cost’ the tax payer 50 per cent of the total amount in the case of voluntary disclosure, along with 25 per cent funds being blocked for four years. This ‘cost’ could be as high as 85 per cent of the total amount in case tax authorities find it out. These changes along with increased scrutiny by tax authorities should also bring in new tax payers in the system.

With about 86 per cent of the total currency by value being demonetised, and deposited into bank accounts, it is likely that the entire amount may not be withdrawn immediately. Further, with limited availability of the cash in system and any present or future limits/restrictions on cash withdrawals would dissuade people to withdraw large sums of cash and instead use other modes of payment.

The real estate sector has been associated with cash transactions. Now, with demonetisation, lack of easy availability of large sums of cash, increasing circle rates and government authorities being more vigilant, it is likely to impact the way transactions are done in this sector. Hopefully, with falling interest rates and easy availability of loans/credit, buyers are likely to insist on cheque payments, with minimum cash involvement.

Though the government and the young technology savvy generation in our society would like to immediately transition to a ‘less-cash’ society, with black economy being reduced to a minuscule level. It would, however, be a long drawn battle requiring continuous monitoring and active plugging of loopholes as we go along. It takes time for a society to change, especially when people are so used to a particular way of life, for last many decades.

In the nutshell, demonetisation is likely to have a significant impact on the behavioural pattern in our society, which will impact the way business is done in India. It will not be an easy transition, however, any major change in the society is difficult, resisted and often a forced one.

The writer is Partner & Leader-Tax, Grant Thornton in India