Will the cashless economy help mitigate tax evasion?

By Mybloodtypeiscoffee - Own work, CC BY 4.0

ASEAN governments are pushing for cashless payments to increase consumer convenience, but there is another reason why they are keen for its widespread adoption.

By Oliver Ward, Edited by Joelyn Chan

As consumer confidence rises and technology improves, ASEAN is poised to see large growth in the use of e-payment systems. However, it has not been adopted equally across the region. In Malaysia, banks like Bank Negara Malaysia are working closely with vendors to bring e-payments to smaller merchants. In Indonesia, DOKU is the fastest growing provider of electronic payments. However, in Thailand and Singapore, the smaller vendors have been slower to adopt the new payment systems, despite enthusiasm from the governments.

With non-existent transaction costs and low traceability, it is little wonder that cash remains preferred payment method for tax evaders to avoid government tax inspectors. But will the rise of a cashless society help lower tax evasion?

Correlation between cash and tax evasion

Empirical studies show a clear correlation between card payments and less Value Added Tax (VAT) evasion. The improved traceability of cashless payments makes it much more difficult for tax evaders to conceal earnings.

Implementing effective policies aimed at curbing tax evasion is a challenge. Public opinion is rarely warm to such attempts. The Indian government tries to tackle the problem through the introduction of biometric payment systems by the year 2020. They have since collected biometric data of 1.1 billion people. With biometrics data tracking each payment, the government hopes to eradicate tax evasion.

However, the large Indian middle class resent the scheme as they frequently withhold cash takings from their business tax declarations.

Is the cashless system a way to manage tax evasion?

It is certainly conceivable. Learning from other countries and considering possible local backlash, Singaporean government would want to explore a more covert method of bringing tax evasion down and switching to cashless payment systems would be one solution.

There are more benefits in a cashless system for the government and banks. Banks and fintech companies would receive unprecedented levels of power and access to every shred of data on every individual’s spending habits, tax payments and movements.

Giving financial institutions greater access to our personal data is even more concerning considering the proposed changes in Singapore’s Data Protection Act (DPA). The new regulations remove the need for companies to seek consent if they fully disclose the purpose of collection, or if the collection of data is for a legal or business purpose.

If the government is genuinely promoting a cashless society for consumer convenience, they should toughen data protection laws to protect consumers instead.

The cashless society exposes the customer to more financial crimes. When the DPA was drawn up in 2012, there were calls to make it a legal obligation for companies to notify customers when a security breach had occurred and put their details at risk. This consumer-centred legislation did not make the final draft of the DPA.

Hawker culture stands to be significantly affected by the cashless economy

The Singaporean government has been particularly keen to push for the adoption of cashless payments among hawker centres, where 70% of consumer transactions are cash-based.  In 2014, NETS FlashPay first introduced their cashless payment systems to three food centres. Since then, more than 15 hawker centres are now using cashless payment systems and the government have committed a S$90 million fund.

The local vendors cite reasons such as inconvenience, technological challenges, lack of space, and rental fee coupled with low adoption rate by customers.

Compare this to China, where cashless payments have taken off precisely because all sectors of commerce have embraced them. From the roadside cigarette vendor to the small pancake stall, all of them accept e-payments. 70% of the Chinese population believe carrying cash is unnecessary and continues to enjoy the ease of cashless payments.

More likely, the drive aims to tackle the widespread tax evasion present in hawker culture

Recent high-profile cases of significant hawker tax evasion have led to the Singaporean government placing their crosshairs on the community of food vendors.

In 2007, the tax evasion prosecution against Mr. Looi San Cheng of Tip Top Curry Puff marked the first case. Within six years, he under-declared more than S$1 million in profit.  In 2016, the courts also convicted Kay Lee Roast Meat Joint’s owners of tax evasion and sentenced them to four-weeks in prison. They had under-declared S$325,000 worth of sales.

The total transparency and digital paper trail involved in e-payments give the government a useful tool in combatting hawker tax evasion. This potential increase in traceability is likely to be the main reason behind the push for a cashless hawker society.

Larger corporate tax evasion dwarfs these figures

Singapore’s well-functioning tax system keeps tax evasion to a minimum. Tax arrears stand at just 0.81% of the total tax assessed but under-reporting and claiming fictitious expenses does still occur. The Inland Revenue Authority of Singapore recovered S$1.8 billion from tax evaders between 2011 and 2016.

However, the largest case during this period was not from a hawker. Chwee Guan Joss Paper Sticks & Candles Trading Co. underreported their profits and government service tax (GST) for nine years, racking up a bill of S$2.3 million in undeclared back taxes. The list goes on with more recent convictions of luxury watch and electronics business manager who evaded more than S$178,000 in GST, and robotic Ice Cream manufacturer who manipulated its GST by more than S$35,000. In fact, only one out of the last 11 convictions for tax crimes in Singapore has come from a hawker under-declaring their earnings.

Rather than thrust the nation headfirst into a cashless economy which only serves to empower financial institutions further, perhaps the government would be better served to go after the prolific corporate tax avoiders.

When the cashless system works to the consumers’ benefit and improves convenience for business owners, it will take off on its own. The government can continue to fund the adoption of cashless technology to boost the local receptiveness and help smaller businesses, which stands to be disproportionally more affected.

For now, cash empowers the smaller businesses, and in a world of rising inequality, they need all the help they can get. We may soon see a cashless economy which benefits all. A situation with consumers embracing e-payments, small businesses equipped with the ability to provide desired payment methods and the government’s increased traceability to minimise tax evasions, is on the horizon, but we are not there yet.

About the Author

Joelyn Chan
Joelyn is a freelance writer based in Singapore. She graduated from Nanyang Technological University with a Double Bachelor in Accountancy and Business. During her free time, she explores the latest developments in fintech and business.