One of the major concerns in the economy of India was the float of black money and cash transactions, which was mentioned as one of the objectives of Demonetization. This resulted in ₹15 lakh crores of cash in the market finding its way to bank accounts, thus coming within the horizon of the economy as a contributor.
This noble, listed objective of shifting to a ‘less cash’ economy seems to be missing a holistic approach to what different wings of the government are doing today. One of the recommendations of the high-level RBI committee was to incentivize digital payments by all wings of government, especially through tax incentives. This has happened in all G2P (Government to Person) and P2G (Person to Government) transactions becoming digital. Whether it is disbursement of benefits, procurement payments, contractor payments, or bill payments by individuals, any payment made to Government authorities is bringing in transparency, ease, and reduced reliance on cash. The idea was to expose 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), the system is incentivizing cash and disincentivizing digital payments. 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 have been supercharged through regulations, NPCI (National Payment Corporation of India) and RBI (Reserve Bank of India). These have eased transactions and are growing geometrically, yet news from Bengaluru reports vendors displaying signs saying “No UPI, only Cash” because of the draconian GST mechanism once turnover crosses ₹40 lakh for goods and ₹20 lakh for services.
Onboarding onto e-commerce has already been considerably curtailed for small manufacturers and vendors, as it requires a GST number and monthly compliance. One cannot continue with the ostrich approach that the sole role of GST is tax collection. A holistic approach is needed to prevent one wing of government from dismantling the larger goal of making the economy of India less cash-dependent.
There is therefore a strong need to implement other recommendations of the high-level RBI committee—such as providing tax incentives for digital payments. For example, if transactions are digital, the GST threshold should increase to ₹80 lakh from ₹40 lakh. Consider the growth in e-commerce and food delivery services, where a ₹20 lakh limit for services is illogical. These businesses work on small margins and cannot absorb GST; adding costs to customers is impossible in a competitive market.
Similarly, direct taxes like income tax should give discounts if 80% of payments are digital. These recommendations have not been implemented. GST notices are pushing vendors back to cash, undermining faith, technology, and transparency in the digital payment system. Raising thresholds would ease fears among street vendors, vegetable sellers, and other small businesses, encouraging continued adoption of the digital payment system that India is proud of.
In India, the volume of digital payment transactions has grown rapidly, with a CAGR (Compound Annual Growth Rate) of 44% since 2017–18. Adoption accelerated in 2019 when RTGS and NEFT were made 24x7 and became the go-to during the pandemic. The value of digital payments rose from ₹2,071 crore in FY 2017–18 to ₹18,737 crore in FY 2023–24, a CAGR of 44%.
In contrast, since Demonetization, cash in the market has strangely doubled—from ₹15 lakh crores to ₹38 lakh crores in circulation. If even 50% of digital transactions shift back to cash, it will be disastrous for the objective of a digital economy. In May 2025, RBI absorbed ₹2.18 lakh crore in liquidity—another red flag showing high cash circulation.
Adding to this, RBI has not taken responsibility for fintech costs of digital payments, despite huge savings from not printing currency, reducing bank footfalls, and avoiding the need for new branches. Talks of taxing UPI per transaction are alarming, as UPI is already linked to KYCed accounts under the tax radar. Taxing such transactions could cause a rapid reversal back to cash. RBI and banks must absorb fintech costs—a long-standing demand of stakeholders.
The Need for Coordinated Policy Reform to Save Digital India
Coordinated efforts by stakeholders—government, regulators, payment systems, and connectivity—are being undermined by the draconian GST approach. Focus should be on reducing GST to two slabs (say 10% and 20%), doubling thresholds to ₹80 lakh for goods and ₹40 lakh for services, and easing compliance for smaller players with turnover up to ₹10 crore. Unfortunately, no such reforms are visible. GST notices are forcing small vendors to remove QR codes and revert to cash. This triggers a chain reaction: buyers, vendors, and wholesale markets shifting back to cash, adding pressure on banks.
Was this the objective of RBI, NPCI, and UPI? Definitely not. It is time to adopt a holistic approach and prevent overenthusiastic tax collection from derailing digital payments. The reverse shift will cost the economy and GDP heavily in growth terms.
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.
