November 07, 2026

Cash transactions leave no trail and are the fountainhead of corruption and tax evasion. Hence, the panel of chief ministers tasked with suggesting ways to combat the cash economy and go cashless has rightly suggested taxing cash withdrawals from banks above a threshold. But the limit of Rs 50000 set by the panel is too low. Given the value of money today, Rs 100000 for individuals and Rs 200000 in a day for others would be a better threshold. The tax should be kept at 0.1% of the withdrawn amount. It can then be graded further for stronger penalty for habitual withdrawers. The tax rate could go up to 0.2% between Rs 100000 and Rs 500000 in a month for individuals and between Rs 200000 and Rs 1000000 for others. Above Rs 500000 and Rs 1000000, it can be as steep as 0.5%. Concurrently, incentives should be provided in the form of some tax relief for going cashless through digital transactions. It is a known fact that disincentives in the form of penal tax seldom work in isolation.

After the implementation of GST, there will be a huge incentive for businesses to come above board as input tax will not be available for exemption for materials sourced without bills from the parallel economy. The problem with cash transactions arise when these are not reported. GST will make sure that to avail input tax benefits and reduce costs, most businesses will source materials through legal channels and refrain from making cash payments as far as practically possible. But the government will need to expand the banking network and improve as well as expand the high speed internet network to make digital payments a success.

Further, section 138 of the NI Act will need to be recast to make it more stringent. Various traders’ bodies have been demanding that a speedy solution must be found to cheque bouncing cases that drag on for months. Unless traders are sure of a speedy redressal in case a cheque received as payment from a buyer bounces they will continue to insist on cash payments from walk-in buyers. The law ministry should apply its mind for a solution to this problem.

Apart from this, the threshold for providing PAN should be reduced to Rs 20000 from the current Rs 50000 for cash transactions. This will ensure that small payments, or even large payments broken into smaller parcels, do not escape the tax net. With most people having PAN due to its mandatory requirement in myriad transactions, reducing the threshold is now appropriate. It will ensure that people will think twice before using cash and not reporting the transaction. The motive should not be to do away with cash transactions totally but to get all cash transactions to be reported and accounted for.

Another problem that should be looked into is the reporting of cash held in hand by taxpayers. In India, the liquid capital in the books of taxpayers far exceeds the actual capital they have in hand. This is because entry operators have made income tax files of lakhs of people to use their ficticious cash balances. It was one of the main reasons why most of the outstanding currency notes were banked after demonetization. With income tax returns simplified and being filled and submitted online with no need to attach a balance sheet, the tax department does not know what an assessee holds as cash in hand. If this was known and recorded, entry operators could not have fudged accounts of lakhs of assessees to deposit lakhs of crores of demonetized currency in benami accounts. Hence, yearly reporting of cash in hand must be made compulsory in income tax returns.

It is well nigh impossible and also not desirable to do away with cash altogether. There are millions of small businesses that will not survive without cash. But if screws can be tightened to do away with large cash deals and if the smaller businesses whose turnover is good can be brought under the tax net, cash will be used only when unavoidable. When hundreds of alternative channels to receive payments will be in place and when buyers will insist on making payment through one of these, sellers will slowly convert, like the chaatwallah who is now accepting digital payments in a bid to go cashless.