Dear Readers, Mint Money has come up with an article on various ways to control the flow of black money and highlights of Black Money and Imposition of Tax Act 2015. Along with encouraging electronic payments, ways should also be devised to discourage transactions in cash.
The government of India has given a three-month window to people with undisclosed foreign assets to come clean or else face prosecution under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The government also introduced the Benami Transactions (Prohibition) Amendment Bill, 2015, in Parliament during the budget session, which seeks to impound benami properties. Remember, the Bharatiya Janata Party-led National Democratic Alliance government was voted to office last year on the promise of curbing the menace of black money, among other things. While these are steps in the right direction, more will be required to control the flow of black money. The government will not only have to check the creation of black money, but also its use. The existing banking infrastructure and the use of Aadhaar can help attain this objective to a large extent. Recently, the government also released draft proposals for facilitating electronic transactions and proposed tax incentives to people opting for it. Although the draft mentions that it aims to curtail tax avoidance, if cash transactions are discouraged and made difficult, it will help the cause. Here are a few steps that could help block the flow of black money.
Along with encouraging electronic payments, ways should also be devised to discourage transactions in cash. Here’s how it can be done. An upper limit for cash transactions can be decided, and if a person still intends to pay this way, she will have to pay a penalty. Let us assume that the limit is imposed at Rs.10,000 and if someone wants to buy the latest smartphone worth Rs.40,000 with cash, she will have to pay a penalty of 10%, which will be deposited by the retailer with the government as tax (let’s call it cash transaction tax) against the buyer’s Aadhaar number. (In future, Permanent Account Number can also be replaced by Aadhaar, but that’s a different debate.) Normal excuses, such as not having an Aadhaar and bank account will not work.
Aadhaar is free and is sufficient for opening a bank account. Anyway, it’s hard to believe that people buying the latest gadgets and other white goods do not have a bank account. So, if someone still insist on paying by cash, you know why. This will require a bit of work in the background such as linking all bank accounts with Aadhaar, which will also show if transactions are in line with income. Initially, transactions in the area of medicine and agriculture can be exempted.
Cash transactions can also be made difficult by withdrawing bank notes of larger denominations. Bank notes in denominations of Rs.1,000 and Rs.500 are meant to facilitate cash transactions. But do we really want that? The unintended consequence is that it also makes transactions in black money easier. Therefore, if Rs.1,000 and Rs.500 notes are taken out of circulation andRs.100 becomes the highest denomination for bank notes, cash handling and transacting will become difficult. Imagine the plight of the person buying that Rs.40,000 smartphone. People will also hesitate to produce large number of notes at billing counters as it will indicate only one thing. Human psychology will also come into play. Psychologically, people will not be comfortable settling large transactions in cash at marketplaces when the entire system is becoming cashless and using cash begins to give the wrong impression.
Cash transactions will become difficult, but then again it may not be possible to pay online all the time. Payments through cheques should also be encouraged. But since there could be trust issues between strangers while settling transactions through cheques, banks can be asked to rate accounts on the basis of banking history of the customer and mention the ratings on cheque leaves. For example, accounts can be rated as A, B or C, where A is the best. So, a person accepting an A-rated cheque will be sure about the settlement of the transaction. This will also encourage people to improve their rating, and thus enhance credibility. Account holders can be penalized by reducing their account rating if a cheque is not cleared.
Furthermore, reforms in the real estate sector will help curb creation and use of black money. Since the cost of transaction here is high, it leads to under-reporting. There is incentive for both the buyer and the seller to under-report the value and settle at least partially in cash. For example, stamp duty in Delhi is 6% for men and 4% for women. Plus, there is a registration fee of 1%. Both put together can be reduced to 0.5% or less. Since cash transactions will be difficult, buyers would be more inclined to report the real value and won’t mind paying the charges. Capital gains tax on real estate, too, can be rationalized. This will also result in liquidity and better price discovery in the property market. Additionally, since the idea is to curb cash transactions, ways can be devised to alert banks of unusual activities, such as large withdrawal of cash.
End note: Are these the only measures to eliminate black money? Probably not. More innovations will be required to route transactions through the banking system. As more transactions go through banking channels, reporting of income and tax compliance will improve leading to higher revenues. Higher tax revenues would, ideally, lead to lower tax rates, which will benefit all tax payers.
Source: Mint Money 9th July, 2015