Will the rise in digital transactions lead to a spike in tax-GDP ratio?

ANALYSIS
Will the rise in digital transactions lead to a spike in tax-GDP ratio?
A man exercises on a bus stop with hoardings promoting digital payments in Mumbai. Digital payments zoomed by as much as 76 per cent in the first three months of 2021 as compared to the first three months of last year.Courtesy: Reuters

Indian businesses, especially in smaller cities and towns, are increasingly adopting the e-commerce / digital payments route to conduct their businesses. This trend is expected to outlast the Covid pandemic and herald an era of less cash in the Indian economy and a higher tax-GDP ratio.

The Covid-induced lockdown and its aftermath have had at least one major positive spin-off for the Indian economy. Small and medium businesses have embraced e-commerce and online payment methods in order to stay afloat.

According to a report by leading online payments solutions provider Razorpay titled “The Era of Rising Fintech”, digital payments zoomed by as much as 76 per cent in the first three months of 2021 as compared to the first three months of last year.

The Narendra Modi government has been making all-out efforts to eradicate India’s notorious cash economy – with all its accompanying ills of corruption, tax evasion, parallel economy and crime. The report’s findings clearly show that the government’s efforts at turning the Indian economy away from its preference for cash is meeting with success.

Caveat: This is just a beginning and there is still a long way to go before India reaches global standards of adoption of digital payments. Also, this report is based only on transactions made on the Razorpay platform.

The report by Razorpay titled “The Era of Rising Fintech” says digital payments soared 76 per cent in the first three months of 2021 as compared to the first three months of last year.

Systemic changes underway

Though the rate of growth may slow down in the months to come, the overall trend, of many more small and medium businesses and transactions going online/digital is expected to outlast the Covid pandemic and could bring about a systemic change in the way India does business and help integrate it faster with the global supply chain.

The report, which is among the most comprehensive on the subject, provides a detailed comparative analysis of the evolution of India’s finTech eco-system over the past year and makes relevant observations on how different segments of the economy reacted to the Covid-19 pandemic.

Union finance minister Nirmala Sitharaman at a pre-budget discussion with stakeholders’ groups from new economy, start-ups fintech and digital. A large section of Indian consumers is looking to conserve cash and opt for buy now pay later schemes.
Union finance minister Nirmala Sitharaman at a pre-budget discussion with stakeholders’ groups from new economy, start-ups fintech and digital. A large section of Indian consumers is looking to conserve cash and opt for buy now pay later schemes. Courtesy: ANI

Indian consumers are feeling nervous

Particularly noteworthy is the finding that a large section of Indian consumers is looking to conserve cash. This is evident from the fact that there was an almost six-fold rise in customers opting for the buy now pay later option.

This indicates a skittishness among consumers. The massive 569 per cent increase in buyers selecting this option, presumably even for items they would have previously paid for in full, points to a certain wariness about the future.

A large section of consumers is looking to conserve cash. There is a massive 569% increase in buyers selecting the buy now pay later option, pointing to a wariness about the future.

Businesses are adopting digital payment

Equally significant is the fact that eNACH payments, a payment system that allows bank account holders to easily recurring payments, saw a growth of an incredible 23,962 per cent in the first quarter of 2021 compared to the previous corresponding period.

This clearly indicates a growing preference among businesses, especially small and medium enterprises, for automated digital payments for recurring payments as against the extant system of making every such payment/transaction manually.

A vendor weighs vegetable next to an advertisement of Paytm, a digital payments platform. The government’s relentless efforts to push for the adoption of digital payments methods over cash transactions is paying off.
A vendor weighs vegetable next to an advertisement of Paytm, a digital payments platform. The government’s relentless efforts to push for the adoption of digital payments methods over cash transactions is paying off.Courtesy: Reuters

Small towns moving away from cash

Another finding that will provide cheer to policymakers in India is that digital transactions are beginning to grow deep roots even outside the metropolitan cities. “The Era of Rising Fintech” says more than 50 per cent of all online transactions take place in Tier II and Tier III cities.

The rise in digital payments will increase India’s tax-to-GDP ratio, which is 10-12%. The figure in OECD countries is 34%, in Brazil it is 32.3%, in South Africa 28.6%, in US 27.1% and in China 17.5%.

These centres have been the traditional hubs of India’s notorious cash economy. The fact that even these towns are adopting digital payments methods – as a means of survival as well as a path to new growth avenues – shows that the government’s relentless efforts to push for the adoption of digital payments methods over cash transactions is paying off, albeit with a small delay.

An attendant accepts payment through the digital mode from a customer at a petrol pump. The increasing adoption of digital payments and e-commerce by Indian businesses augurs well for the future.
An attendant accepts payment through the digital mode from a customer at a petrol pump. The increasing adoption of digital payments and e-commerce by Indian businesses augurs well for the future.Courtesy: ANI

Tax-GDP ratio may improve

The increase in digital payments / online transactions will reduce the scope for cash in the Indian economy and, over time, result in an increase in the tax-to-GDP ratio, which at present does not do justice to the world’s fifth largest economy.

The tax-to-GDP ratio is the amount of taxes a country collects in comparison to its GDP. Simply put, it is the total tax revenues of a country expressed as a percentage of its GDP.

In India, this figure has hovered in the 10-12 per cent range in recent years. In contrast, the tax-to-GDP ratio in OECD countries is 34 per cent, in Brazil, it is 32.3 per cent, in South Africa the figure is 28.6 per cent, the US gets 27.1 per cent of its GDP as tax, while in Russia and China, the figures are 24.1 per cent and 17.5 per cent, respectively.

Since online transactions and payments leave a digital trail that can be easily audited, the increasing adoption of digital payments and e-commerce by Indian businesses augurs well for the future and, if sustained, could presage future tax buoyancy that will enable the government to increase the size of its Budgets.

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