1. Opinion: Curbing cash a better tool than black money compliance window

Opinion: Curbing cash a better tool than black money compliance window

The government should fast-track measures like tax incentives to promote plastic money and electronic transactions.

By: | Updated: July 14, 2015 1:12 PM
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Government has proposed income tax benefits for people making payments through credit or debit cards and doing away with transaction charges on purchase of petrol, gas and rail tickets with plastic money.

Santosh-TiwariThe government coming out with the proposal to give tax benefits on credit/debit card payments ahead of the compliance window for disclosing black money, which is expected to be announced next month, is a good idea. Curbing the cash economy will yield better dividends in tackling black money in the country as it is the generation and illegal circulation of ill-gotten wealth that needs to be checked if the government is serious about making a dent in the black money economy.

All the measures proposed in the draft paper issued by the government — income tax benefits on payments made through credit or debit cards – no transaction charges on purchase of petrol, gas and rail tickets with plastic money – mandatory settling of high value transactions of more than Rs 1 lakh through electronic mode – tax rebate for shopkeepers who will accept a significant value of sales through debit or credit cards – will promote electronically recorded transactions.

The income tax department has been collecting information on high value transactions through annual information returns filed by the agencies handling them, and once the tax incentive model comes into existence, a comprehensive data repository will be available to track tax evasion cases. In fact, a large part of the black money can be brought to the book if cash is weeded out of the sectors like real estate and gems and jewellery. But, the government needs to ensure that the taxman doesn’t exploit the information gathered through electronic transactions for harassment and also the service charges doesn’t pinch the consumers’ pocket.

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The efforts in the past to generate transaction trails in these sectors have failed to deliver any significant result and how far incentivizing of the use of plastic money will succeed here remains to be seen, but there is no doubt that insistence on electronic transaction is the way forward to stop black money from growing further.

This is where tracking of the whole GST chain will also help, and that is why the GST needs to be exemption-free. Bringing the whole production chain under the GST ambit will reduce the chances of generating and circulation of black money to a large extent.

The NDA government will do well by implementing these measures earnestly instead of expecting too much from the black money compliance window (2-5 months, as decided by the finance ministry), to allow people to disclose their black money and escape the stringent provisions including prosecution that will be applicable from April 1, 2016. Those disclosing their hidden wealth will have to pay tax at the highest rate of 30% and also an equal amount of penalty to avoid getting subjected to 30% tax and a 90% penalty under the law, which would mean paying 20% more than even the value of the assets that will be discovered, besides prosecution.

Even India’s most successful amnesty scheme – the difference between such schemes and the current compliance window is that you don’t have to pay the penalty — VDIS 1997, succeeded in collecting just 2.3% of that year’s GDP. Going by this experience, a significant number of people might not opt for this route.

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  1. N
    Narendra M
    Jun 23, 2015 at 5:55 pm
    (1) Idea of tax breaks appears to be good on the face of it; its success lies in strict implementation of rules and regulations. If the procedures are faulty, there will be loss of revenue. (2) The Income Tax Department (ITD), and its higher authority, the Central Board of Direct Taxes (CBDT), are very much aware of the businesses wherein cash transactions are done predominantly. Perhaps in some cases, like of agricultural produce, cash transactions are a huge source of tax evasion since income from agriculture is tax-free and there is hardly any scrutiny of such transactions. Hence I believe that tax breaks for transactions through ATM and Credit cards would be effective only if ITD is in a position to close gaps which allow income to escape tax net.
    1. P
      Jun 23, 2015 at 4:59 pm
      This is an excellent initiative by Government, and I fully support it. With the key objectives of a. Encouraging tax compliance with efficiency and simplicity, bringing in all stashed unaccounted money/ets (in any form) into legitimate mainstream economy; b. Discouraging tax evasion and generation of any additional unaccounted / black-money, and making black money (and illegally acquired Gold or other ets) absolutely worthless and impossible to utilize; c. Rewarding the legitimate wage earners / honest tax payers and penalize the evaders, directly and indirectly; I would like to make the following recommendations: 1. From 2016, transactions for the following should be permitted only via Credit/Debit cards or traceable electronic payments. This will minimize tax evasion, maximize efficiency and compliance and improve national security: a. Jewellery, Bullion, Forex purchases b. All transactions in Shopping Malls, Furniture Shops, Electronic shops, Garment shops, Gift shops c. Transactions in all air-conditioned shops and showrooms, or anything more than Rs. 1000 in others d. AC restaurants, Bars, all Wine and Liquor shops, all Hotels and Lodges, Spas, Beauty Parlours, e. All E-Commerce sites / companies f. Interior and exterior decorators, event / shamiyana organizers, indoor/outdoor caterers g. Fuel pumps for 4 wheelers (or all transactions above Rs. 200 for anyone) h. Real estate builders/developers, agents. i. Hospitals, Political Parties, NGOs, Charitable Trusts, Schools, Colleges, Tuition cles j. Airline tickets, Car Rental / Radio Taxis / Organized taxis k. Travel agents, Foreign SIM card providers, l. Automobile, accessories, spares, workshops Till then, cash transactions should be made very difficult, such as submission of doents, Aadhar and PAN copy, declaration of source of income and compliance to tax for every transaction, or 33% TDS / Withholding method. 2. Instead of proposed scheme of e-transaction upfront discount or tax incentive to merchant, which can potentially encourage Merchants to carry more cash transactions without recording then, Govt. should avoid differentiation in end-user pricing or tax collections at any point of . Further, differential treatment can cause issues in accounting. The solution: a. For Consumers: Govt. should introduce “cash-back / tax refund” on all e-transactions, on quarterly basis, partly/fully offsetting certain direct tax (say, 5% of Income Tax the user has already paid for) or indirect tax (e.g. Service Tax / VAT). This will effectively encourage tax compliance and discourage suppression of income and spending with hard cash. b. For Merchants: VAT credit (say 1.5%), only for e-transactions, credited on annual basis. No credit for cash transactions, this will encourage Merchant to move totally towards e-transactions sooner. Even with future GST, Govt should discourage offsets against cash transactions (are always questionable) 3. To minimize generation of black money and encourage e-transactions and small savings by farmers/household-workers/drivers/mechanics/micro-entrepreneurs etc., introduce cash-withdrawal / banking transaction tax of a. 3% for all cash withdrawals above Rs. 120,000 per year per person in 1st year b. 5% for all cash withdrawals above Rs. 100,000 per year per person in 2nd year c. 10% for all cash withdrawals above Rs. 90,000 per year per person in 3nd year 4. For Individuals: Make it illegal to possess more 5% of annual income (as per last tax returns) in cash in any currency or form. Upper limit Rs. 10 lakhs irrespective of income level. For establishments (say ceiling of 4 days of receipts in hard-cash or 7 days of cash pay-out liability as per last tax returns) in cash in any currency. 5. Abolish annual charges, service tax on Credit / Debit, interest, penalties etc. Also put a cap on interest charged by the Card issuers, say RBI repo rate 6%, reset every quarter to simplify comtions by issuers. And minimize transaction fees (say, 0.5% subject to a max of Rs. 10, for debit/credit cards of bank account holders with sufficient balance and bears no credit risk). 6. Instead of going after already overburdened ried cl for additional taxes, Govt should get the black money into tax net. Most black money is held either in the form of gold/silver/precious metals or stones, real-estate, hard cash / foreign exchange, expensive art, automobiles etc. many times in ficious names with Power of Attorney in the name of the dishonest Black Money owner, making it impossible to trace. 7. To tackle fraudulent and hidden investments in real-estate, other immovable as well as movable ets, automatic expiry of Power Of Attorney every 3 years, except for mortgages with recognized banks. Compulsory renewal and re-registration should be necessary, with appropriate declarations. 8. Also all transactions should be compulsorily through traceable electronic means, forcing the illegitimate owners to either convert their ets into traceable electronic form with declaration, or abandoning the black ets. In the present form, those should be made absolutely worthless. This will bring in much needed improved tax compliance, increased tax collections, transparency and discipline, and also reduce national threats.

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