One of the major concerns in economy of India was float of black money and cash transactions that was mentioned as one of the objectives of Demonetization. That resulted in cash in market Rs 15 lakh crores finding its way to the bank accounts, thus coming in horizon of being in the economy of the country as contributor.
This noble listed objective of shift to ‘less cash’ economy seems to be missing the holistic approach to what different wings of the government are doing on date. One of the recommendations of the high-level RBI committee was to incentivize digital payments by all wings of government and especially tax incentives. That has happened is all G2P (Government to Person) and P2G (Person to Government) becoming digital. Whether it is disbursement of cash benefits, payments to procurement, payments to the contractors and by persons all bill payments, any payments to be made to Government authorities bringing in transparency, ease and reduced reliance on cash. The idea was that it would also be exposed and make it difficult to hide black money.
GST Policy Conflicts Undermining Digital Payment Adoption
However, with a very high percentage of GST(Goods and Services Tax), it has resulted in incentivizing the cash and disincentivizing the digital payment system. UPI(Unified Payment Interface) NEFT(National Electronic Fund Transfer) RTGS (Real Time Gross Settlement) IMPS (Immediate Payment Service) and BBPS(Bharat Bill Pay for business) superheated through regulations and NPCI (National Payment Corporation of India) and RBI (Reserve Bank of India) have eased the transactions and therefore growing in geometric proportion but the news item of Bangalore signs appearing “No UPI only Cash” by vendors because of draconian GST taxation mechanism moment turnover cross 40 lacs for Goods and just 20lacs for services.
The onboarding on e-commerce has already been considerablycurtailed to these small manufacturers and vendors as requires GST number and then the cumbersome per month compliance. One cannot continue to have ostrich approach that role of GST is to collect increasingly taxed but to adopt holistic approach, whether one wing will dismantle the major goal of making economy of India more less cash.
There is therefore a strong needto also take actions like other recommended points of high-level committee constituted by RBI to deepen digital payments to give tax incentives. If transactions are digital the threshold to increase to 80lac from 40 lac. Look at the increase in e-commerce and food delivery services where 20 lac limits are illogical for services. That is based on just turnover and maximum of them work on small margins and cannot absorb the GST. Adding to their customer the cost is impossible in a competitive market.
Similarly for direct tax like income tax to give discount if 80% of payments are digital from their accounts. These two have not seen light of the day. The GST notices resulting in shifting to cash will be disastrous to the faith, technology and transparency that has come to digital payment system. The pani-puriwalas and the vegetable vendors or other food tiny unorganized sector joints with increase in threshold will ease their fears and continue to encourage them to adopt the digital payment system that India is proud of.
In India, the volume of digital payment transactions has shown more adoption and popularity with CAGR (Compound Annual Growth Rate) being 44% since 2017-18- becoming popular since 2019 when the RTGS and NIFT were made 24 by 7 and was go to in pandemic. The value of digital payment transactions has increased from 2,071 crore in FY 2017-18 to 18,737 crore in FY 2023-24 at CAGR of 44%.6 Nov 2024
In contrast since, demonetization the cash in market from 15 lakh crores has strangely doubled to now amount of currency in circulation (key indicator for cash in market) is Rs38lack crores—more than double and to that if shift from digital payment to cash even if is 50% will be disastrous to objective of shift to digital payment and economy of the country. RBI in May 2025 absorbed Rs 2.18 lach crore in liquidity and is a red flag as indicates cash in circulation in the market.
Add to that, RBI not taking burden of fintech cost of digital payment even though there is huge saving in terms of no need to print currency and opening more branches or recruit for footfall in banks. Talk is even to tax the UPI per transaction. The digital payment is from KYCed bank account and already tax radar and paid. That transaction if taxed by UPI will again have a rapid shift to tax. RBI and banks are to absorb the fintech cost a long pending demand by all the stake holders.
The Need for Coordinated Policy Reform to Save Digital India
The coordinated efforts by different stakeholders like government, regulator, payment system, connectivity all seem to be put down the drains by draconian approach to GST notices. The focus and effort must be to reduce the GST tax to just two slabs say 10 and 20%. Second, to enhance the minimum limit by doubling the existing threshold of 40lack for goods and 20 lakhs for services. Third, to ease the compliance statements to smaller players with turn over of say 10 crore and focus on more than that for collection of GST. Unfortunately, no efforts and decision making are seen in this direction. The GST notices to small vendors going to QR codes being removed and shift to cash. This will trigger the entire chain of buyers shifting to cash, the vendors, the whole sale market adding to burden to footfall in the banks.
Was this the objective of RBI, NPCI and UPI? Definitelynot, so time to ensure holistic approach and not allow enthusiasm in tax collection without understanding market and need for corrections derailing the entire efforts of digital payments. It is a red flag to be attended immediately. The reverse shift is going to cost is fall in growth terms for economy and GDP a lot.
Also Read: RBI Issues New Master Directions for Payment Aggregators
About the Author
Dr. Aruna Sharma, Practitioner Development Economist and retd Secretary GoI, is a distinguished development economist and former Indian government secretary who served in the Ministry of Electronics & IT and Ministry of Steel. She contributed to the Reserve Bank of India's High-Level Committee on Deepening Digital Payments, advancing financial inclusion nationwide. Her expertise encompasses e-governance, fintech, digital assets, and panchayat-level governance models. Currently serving on multiple corporate boards, Dr. Sharma provides thought leadership on economic policy and digital innovation. She has authored five bestselling books, including "Dancing Towards a $5 Trillion Economy through a Holistic Ride," focusing on rural development and India's economic transformation through digital infrastructure and governance reform.
