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India goes digital to tackle 'black money'

Government pushes mobile payments in its crusade against untaxed transactions

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India's Prime Minister Narendra Modi looks on before launching a digital payment app linked with a nationwide biometric database during the "DigiDhan" fair, in New Delhi on Dec. 30, 2016.   © Reuters

NEW DELHI If you're in India and spending more than a few thousand dollars in cash, be prepared to pay a steep penalty for your actions.

In March, the government of Prime Minister Narendra Modi capped cash transactions at 200,000 rupees ($3,102), tightening an initial cap of 300,000 rupees announced in February. The move is aimed at tackling "black money," or untaxed wealth, and promoting digital payments.

"The penalty for violating this [limit] is a fine equivalent to the amount of transaction," Revenue Secretary Hasmukh Adhia tweeted on March 21.

The Income Tax Department took out newspaper ads on June 2 to remind people of the new regulation and the punishment for violating it, and to encourage them to share information on any illegal cash transactions at The email address was created a month after the shock demonetization of 500- and 1,000-rupee bank notes on Nov. 8 that removed 86% of the country's cash by value from circulation.

India's traditionally cash-dependent economy has facilitated rampant corruption and tax evasion in the country of over 1.3 billion people, with real estate and jewelry among the biggest sources of untaxed transactions.

The surprise ban on high-value bank notes dealt a severe blow to those hoarding black money, leaving them with bills that were no longer legal tender. But the government did not stop there. Its focus now is on curbing the further generation and flow of illicit money.

In addition to capping cash transactions and promoting the mass adoption of digital payments, the government is also making use of the Aadhaar system, under which every Indian citizen is issued an identification card based on his or her biometric data.

The Aadhaar identification is now required for obtaining a permanent account number, or PAN, which is needed for opening a bank account. PANs are issued by the tax department and used to track an individual's financial history with an eye toward clamping down on black money. Aadhaar identification is now also mandatory for filing income tax returns. As of May, India had about 1.15 billion Aadhaar cards and over 400 million bank accounts linked to Aadhaar numbers.

On June 1, Finance Minister Arun Jaitley said demonetization has helped to spur the shift toward digital payments and increase the taxpayer base. The provisional figure for tax collection -- including both direct and indirect levies -- in the fiscal year ended in March stands at 17.1 trillion rupees, up around 18% from the previous year.

PERFECT TIMING "The message has gone home loud and clear and it continues to go almost every day that it's no longer safe to deal in cash," Jaitley said. Demonetization and the other steps taken to encourage "clean money" are establishing "a new normal" in India, he added.

The government's ambitious policy to encourage a less cash-focused society comes hand in hand with the massive proliferation of mobile broadband usage -- the number of internet users in the country is expected to exceed 450 million this month. Among the beneficiaries of this explosive expansion are digital payment providers such as Paytm, MobiKwik, Oxigen and Airtel Money.

Paytm, backed by China's Alibaba Group Holding, announced on May 18 that it had raised $1.4 billion from Japanese telecom giant SoftBank. The Indian company said it plans to spend $1.6 billion over the next three to five years to win 500 million new customers and launch various financial services. Its fee-free QR code-based payment service saw its popularity take off due to the cash crunch brought on by last year's demonetization. It now boasts 255 million monthly transactions, compared to just 55 million before the bank note ban.

"[The demonetization] accelerated our journey by two years," Paytm founder and CEO Vijay Shekhar Sharma said on May 29 on NDTV.

The Indian mobile-wallet market is enjoying strong growth thanks to the increasing use of smartphones coupled with the spread of mobile internet and a rise in disposable incomes. In 2016, there were 600 million mobile-based transactions. This figure is expected to reach 260 billion by 2022, growing at a compound annual growth rate of 163%, according to a joint study by the Associated Chambers of Commerce and Industry of India and consultancy RNCOS.

Looking to squeeze cash transactions further, the Indian government itself has rolled out several digital payment options, including the Bharat Interface for Money, or BHIM, app. This app enables easy and quick transactions using the Unified Payment Interface, which is regulated by the Reserve Bank of India and facilitates instant money transfers between two bank accounts via a mobile device.

On April 14, the government said the BHIM app had set a world record by logging 19 million downloads in just four months since its December launch.

Aadhaar Pay is another service being promoted by the government. By simply installing this app on a smartphone and attaching a fingerprint scanner, a merchant can start accepting payments from all Aadhaar-linked bank accounts.

THE INCLUSION FACTOR The biggest impact of all these moves to promote digital payments "will be improved financial access, which is nothing but financial inclusion," N.R. Bhanumurthy, an economics professor at National Institute of Public Finance and Policy, told the Nikkei Asian Review.

With nearly 300 million people in India living in extreme poverty, Modi has made financial inclusion one of his priorities. To plug leaks and reduce the need for intermediaries in the transfer of welfare funds to the poor, for example, his government has launched an initiative to link a national program for providing citizens with banking and other financial services to Aadhaar and mobile phone numbers.

India runs nearly 1,000 welfare programs to tackle poverty, including employment, food security and housing projects, but these involve complex layers of bureaucracy and are plagued by allegations of corruption. As a result, the intended benefits often fail to reach those who need them the most. The government is optimistic that digitization and greater mobile penetration can help overcome these challenges.

Digital payments, Bhanumurthy said, will also lead to a "substantial reduction in transaction costs" for businesses, which in turn could encourage banks and others in the financial sector to pass the benefits on to consumers. "The cost of transactions coming down will help monetary policy and should increase the speed of [the monetary] transmission mechanism," he said.

But Bhanumurthy also pointed out the potential security and privacy risks of linking various digital initiatives to Aadhaar "because this is the only thing where we have all [biometric] data information, and the government itself very clearly told the Supreme Court that it is not a fool-proof [mechanism]" after reports of some data leaks emerged. "I'm slightly pessimist on the security and the risk side."

In a May 9 brief, the Observer Research Foundation said digital financial services are "risky and borderline exploitative" without a strong data privacy and security regime. Biometric authentication, it said, can be even riskier than other authentication methods. "So far, the Indian government has failed to mitigate those risks through privacy and security measures," said the brief's author, Bhairav Acharya, a program fellow at New America's Open Technology Institute in Washington.

India, which is growing at roughly 7% annually, is standing on the cusp of a digital revolution. But while government initiatives and a rapid increase in high-speed mobile broadband are ushering in sweeping changes, the country still needs a robust data protection law and other measures to protect the digital security of its citizens.

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