The sudden ban on the use of ₹500 and ₹1,000 notes from the midnight of November 8 was a dramatic and unexpected move. The demonetisation drive impacted 86 per cent of the money in circulation, amounting to ₹14 lakh crore or $217 billion, and is expected to have long-term benefits for the economy.
Another outcome of demonetisation is that the financial sector has adopted digital payment systems in a big way.
Recapitalisation
Although recapitalisation has been a major thrust area for the exchequer, it is not the only solution to stabilise the capital structure of the ailing PSU banks. Infusion of such large capital puts pressure on Government coffers and cripples its public expenditure outlays.
It also puts an extra burden on the people through taxes, as the Government is forced to plug the deficits. Banks need to be given a clear mandate to opt for other capital raising alternatives, such as masala bonds (rupee-denominated bonds).
Tax relaxation for senior citizens
With the demonetisation drive bringing in massive funds into the current accounts and savings accounts of banks across the country, the marginal cost of funds has gone down. This, in turn, has negatively impacted pensioners and senior citizens who have lost out on their monthly income scheme interest. The Government ought to look into this and concomitantly reduce the tax burden on senior citizens.
Tax cuts for digital transactions
The Budget should provide an impetus in terms of rebates for clients doing the bulk of their transactions through digital modes.
Service tax exemptions
Pradhan Mantri Jan-Dhan Yojana (PMJDY) and other financial inclusion schemes have given rise to bank business correspondents and thus there should be a drastic relaxation of service tax for this segment. It should include in its ambit all services provided in rural belts and not just PMJDY-related services. This will encourage business correspondents to reach out to more unbanked areas, given that India’s unbanked population is almost 60 per cent.
Exempt NPA provisioning from tax
Non-performing assets have for long been a menace to the banking sector and banks have been increasing their provisioning amounts to deal with them. Such provisioning should be exempt from tax, considering such assets not only put pressure on banks’ profitability but also impact GDP and, in turn, the nominal exchange rate, leading to further devaluation of the rupee.
Centralised GST bracket
Coming to GST implications, the Government should look at having a centralised registration structure when it comes to banks rather than making it on a State-wise basis, to avoid complications in calculations.
Salary through banks
The Government should make it mandatory for every organisation to pay salaries through employees’ bank accounts. This would help reduce tax evasion.
Capital infusion
With over 90,000 rural cooperative societies in India and over 200 regional rural banks, and State and urban cooperative banks, it is the Government’s responsibility to help such entities move to a digital environment. It should provide necessary budgetary support. Also, IT companies servicing these banks should be given service tax exemptions for a particular period.
Tax holiday for new banks
New banks that have been given licences need to be provided tax holidays till they have mobilised a certain stipulated amount of deposits.
All these measures would go a long way to help provide the necessary support to enable a smooth digital transformation in the banking and financial sectors.