There’s a fine line between a helpful paternalistic government that takes necessary decisions on behalf of the people and an overbearing one that intrudes into what should ideally not be any of its business. The Indian government has largely been the former. However, recent steps the Modi government has taken, such as increasing the tax collected at source (TCS) on international transactions, underscore the quickening slide towards the overbearing side.
This shift also reveals a couple of paradoxes in the way the government thinks about the people. On the one hand, the government is rightfully proud of the steps it has taken to enhance financial literacy and inclusion, but on the other hand, it takes steps to infantilise the people by banning anything that could potentially harm them.
The whole point of financial literacy is to empower people to make decisions on their own.
The second paradox is that this infantilisation is accompanied by a significant increase in the compliance burden on the people. So, which is it? Are the people to be coddled, or are they savvy enough to comply with complex tax rules?
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Laws that make sense
A paternalistic government is one that takes decisions on behalf of the people as it assumes they don’t always use the best judgement. So, there are laws mandating that people wear seat belts, or that bike riders wear helmets. The assumption is that, given a choice, people will willfully put themselves in danger by foregoing seatbelts and helmets, and so a law is needed to force them to not throw away their lives.
Perhaps the earliest financial paternalistic step taken by the government of India was the promulgation of the Employees’ Provident Funds Ordinance in 1951. The Ordinance and the subsequent Act passed the following year set up a system whereby people were forced to save towards their retirement.
The (largely correct) assumption was and continues to be that people aren’t prudent about saving and will be left penniless when they stop working. It was also a valid concern in 1951-52 that most people simply didn’t have the means or the financial knowledge to save.
While financial literacy has certainly improved markedly since then, as has access to banking services, the ability to save remains woeful.
The latest World Bank data for 2022 shows that just 23.5 per cent of Indians saved in any form, only marginally higher than the 22.6 per cent for South Asia as a whole, and far lower than the 32.5 per cent average for lower-middle-income countries, of which India is a part.
So it makes sense that the law mandating that a chunk of your salary goes towards your Provident Fund remains in force.
What makes less sense was the RBI’s hurry in 2018 to prohibit the use of cryptocurrencies. While not a ban exactly, the central bank basically instructed all the entities it regulates—banks, non-banking financial institutions, regional rural banks, etc—not to have anything to do with cryptocurrencies or those involved with them.
Basically, people couldn’t use their bank accounts to buy or sell cryptocurrencies, which meant that the Indian rupee couldn’t be converted into cryptocurrencies and vice versa. It was pretty much a ban, it just wasn’t called one.
If the reason for this was to protect the stability of the financial system, then that at least would have been understandable. Instead, the RBI said the reason for its decision was to protect the people from the “various risks associated in dealing with such virtual currencies”.
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Regulatory overkill
Banning a product or activity where people can lose their savings toes that line between paternalism and Big Brother. My own belief when it comes to these things is of caveat emptor, or buyer beware. At most, the RBI should have set up a fraud redressal mechanism. However, if a user loses their money because the crypto asset they put money in lost value, then that’s the same risk as investing in stocks or mutual funds. Too bad. While only El Salvadore has allowed cryptocurrencies as legal tender, there really wasn’t a need for India to rush to join the small group of countries that had banned them.
Thankfully, in 2020 the Supreme Court overturned the RBI’s decision. The government, too, seems to have changed its stance.
Where its 2019 draft bill on cryptos was uncompromisingly named the ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Act’, this was softened to ‘Cryptocurrency and Regulation of Official Digital Currency Bill’ by 2021. The government’s current stand on cryptocurrency transactions—to tax profits but otherwise leave users to their own fates—is a substantial step back from the RBI’s overbearing attitude, it must be said.
A more recent overly-protective step by the government was to prohibit online betting. The argument here, too, was that too many people were losing too much money. Rather than investing in increasing awareness about the risks of betting and the pitfalls of gambling addictions, the government’s solution is to implement bans. All this really does is push these activities into the shadows.
Now, it can be argued that banning cryptocurrencies and online betting, while intrusive, are still in the interests of the people. But the government has now progressed to implementing intrusive rules that not only have no benefit for the people but also force taxpayers to do the government’s job for it.
The 20 per cent tax collected at source (TCS) on international transactions is an unnecessary mechanism to track such transactions and falls into the Big Brother category. It is clear that the government wants to track how much money you spend abroad.
The government’s argument also is that the TCS isn’t a real tax since it will be offset against the final tax to be paid at the end of the year. It also says that the 20 per cent rate wouldn’t be a burden on high-net-worth individuals, the bulk of those who would have to pay the TCS.
What it conveniently forgets to mention is that the Rs 7 lakh limit over which this TCS would apply was brought in only because of the outrage the rules caused, even among those who usually support the government.
What the government is also quiet about is that the precise point of its digital transactions push—starting with demonetisation—was that these would be easier to track than cash transactions. So, what happened? Was linking our PAN, Aadhaar, bank accounts, and mobile number not enough?
Was the only workable solution it could think of to confiscate people’s money and give it back only if all rules are complied with 
Separately, why is it that people who want to withdraw more than Rs 20 lakh of their own money, from their bank account, have to provide physical copies of their PAN and Aadhaar? Wherefore art thou, Digital India?
Why must the citizens fall over themselves to give the government everything it needs to track transactions when the government itself boasts of all the steps it has taken to ease compliance and improve its efficiency?
Yes, Prime Minister Modi talked about ‘minimum government’, but nobody thought he meant making the citizenry do the government’s job!
The author tweets @SharadRaghavan. Views are personal.
(Edited by Theres Sudeep)