By encouraging electronic transactions to reduce the use of cash, the Modi government is treating the symptoms and not the disease
The Prime Minister’s Office had recently put out on its website a draft proposal for facilitating electronic transactions in the country and had invited comments and views from the public. The Finance Minister in his budget speech in February this year had proposed to introduce several measures that will incentivise credit/debit card transactions and dis-incentivise cash transactions with a view, inter-alia,
to curb flow of black money in the economy. The detailed proposal of the government and the incentives proposed have been covered by Moneylife on 23 June 2015 (Read: Government proposes tax benefits for credit, debit card payments
The incentives proposed by the government only treat the symptoms and not the cause:
The measures suggested in the draft proposal to popularise e-transactions include reducing the charges levied by banks, merchant establishments, utility companies, government departments etc. for using the card for effecting payments and offering tax benefits for those using the cards or making electronic payments through the internet or mobile phones etc. The incentives proposed will only treat the symptoms and not the cause. However much you incentivise for usage of cards and e-transactions, it will not eliminate the temptations for using cash unless you remove the cause for using cash in your day-to-day transactions. There are two important areas where people use cash in preference to cards or electronic payments and they are explained here with simple solutions to minimise cash transaction and increase e-transactions in the country.
1. Why do retail traders prefer cash in day-to-day transactions?
When you go to buy any item of daily use in the market, most of the small traders, ask you to pay by cash. This is mainly due to fact that they do not have the support systems to keep records, write accounts, file returns and comply with all other formalities required to be completed as per the indirect tax rules. Today they have an obligation to collect sales tax or value added tax and then follow elaborate procedures for compliance of all regulatory requirements. Hence, it is easier for them to accept cash and file returns on the basis of total cash collected rather than through cards, which involves additional work of matching the receipts with bank accounts etc. Besides, accepting a card is fraught with risk of loss of revenue, if the banks disallow any transaction due to fraudulent use of cards etc.
What is the solution? The best solution is to take away that obligation of collecting taxes from the last seller/ retailer and impose that obligation on the manufacturer or the wholesaler, who alone should be made responsible for payment of sales tax for all the goods sold to the retailer or semi-retailer. This will encourage all in the retail chain to issue cash bills to the buyers and accept payment by debit or credit cards, if they are protected against credit or debit card frauds as well. This will not only reduce use of cash but also considerably improve revenue for the state. Besides, it will also reduce the work of small traders having to file sales tax returns and the govt. having to chase innumerable traders who do not pay to the exchequer the sales tax collected by them. These changes will simply bring more revenue into government treasury, while making life easy for a large number of retail traders in our country.
2. Why should immovable property deals have cash component?
The second most important area of use of cash is in transactions involving immovable properties. With the tightening of income tax rules, a lot of improvement has taken place and most of the institutions, corporate and law abiding citizens insist upon full payment in all transactions while buying immoveable properties. But there is always an inducement to pay a part of the amount in cash for every property transferred from one person to another. This is because there is an obligation to pay stamp duty and registration charges levied on the basis of the value declared in the sale deed with a minimum of the guidance value periodically fixed by the government. Due to this obligation, there is a temptation to declare the transaction value as low as possible near the guidance value, and make all extra payments agreed by means of cash, thereby saving on the stamp duty payable.
What is the solution?
a) Firstly, the best solution is to declare and fix guidance value for all properties in the country, city and ward-wise, town-wise and village-wise every year and all property transactions should bear stamp duty and registration charges at these rates fixed by the government irrespective of the value declared in the sale deed. By fixing the property price for payment of stamp duty, there will be no temptation for the buyer to declare a lower value than what is actually paid to the seller. The government can revise the guidance value on the 1st April ever year or link the revision to inflation or the Realty index, thereby ensuring automatic increase in guidance value year after year. If this is done, the buyer would insist upon full declaration of the price paid by him in the property deed, and avoid paying any part in cash, as it will not require him to pay stamp duty higher than the guidance value, whatever is the agreed or declared price for the property.
b) Secondly, to encourage the seller also to accept full payment by cheque, the best solution is to completely overhaul the system of capital gains tax on all immoveable property transactions. Instead of the present complex system of computing capital gains tax on sale of immovable properties, the government must introduce a new system of levying property transaction tax (PPT) and do away with capital gains tax on immovable properties altogether. This is similar to securities transaction tax (STT) collected on all stock market transactions presently in force and working very well for the last several years. The PPT can be collected on all property transfers at the time of registration of property itself by the registrar at a nominal percentage on the registered value of the property and exempt all such deals from the capital gains tax totally. The government can also abolish the system of TDS on property transactions introduced since last year. This will encourage the seller also to receive full payment by cheque and do away with the cash component in property deal altogether.
If this suggestion is implemented, it will have triple advantages for the government. Firstly, the government will get revenue much more than what it collects by way of capital gains tax, as under the present system, most of it is avoided legally or otherwise by various means as the entire system is messy, cumbersome and full of loopholes. Secondly, use of cash on all property deals will be totally avoided, as it will not get any additional benefit either to the buyer or the seller. Thirdly, the need for deducting tax (TDS) by the seller will be totally eliminated thereby simplifying the entire tax collection system and the tax authorities will not have to go after the tax deductors, if they fail to remit the TDS to the government.
The above suggestions can be fine-tuned and improved depending upon the need to make them simple, smooth and easy for implementation without loss of revenue to the government.
By treating the basic cause and not the symptoms for cash usage as mentioned above, coupled with the incentives proposed, the objectives outlined in the scheme will not only be met, but life will also be much smoother and less troublesome for the large majority of our people in the country. And this will be a step in the direction of “minimum government and maximum governance” enunciated by our Prime Minister.
(The author is a financial analyst, writing for
Moneylife under the pen-name ‘Gurpur’.)