Economy
What the Modi government can do to reduce the use of cash
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’.)
 

User

COMMENTS

Srivathsan

1 year ago

reduction of cash transactions. introduce cashless transactions at electricity payment counters,insurance counters, telephone counters,petrol and diesel, fertilizer, seed pesticides, all shops registered under sales tax, all shops having trade licence in urban areas and this will greatly improve habits and reduce cash transactions.

Srivathsan

1 year ago

Reduction of cash transaction is a very good move.There will be certain resistance and protests and negative remarks for any change.We suggest the following areas of transaction be made CASH free( only cheque,draft, debit card credit card or fund transfer,ECS etc.
Electricity payment ,telephone bills, mobile and land line,insurance,petrol pumps for petrol and diesel,govt taxes,and make it mandatory to have swipe card machine in all commercial establishments registered under Sales tax or corporation,trade licence and suitable incentive for both giver and taker of funds through card sytem

manoharlalsharma

1 year ago

What the Modi government can do to reduce the use of cash /is only doing as precedent Governments done to collect the AADHAR NO and suit NOTICE 4 INCOME-TAX so please do not PRAY to CASHLESS transactions.

Yogesh Tiwari

1 year ago

I strongly disagree with the author on the analysis and solution to reduce cash transaction in immovable property. Firstly the premise that cash transactions are done solely to avoid Stamp Duty applies only to the buyer of the property. Only he has an incentive to report less on the agreement to reduce Stamp Duty expense. However, the biggest culprit are the builders who ask for as high as 50% transaction in cash because they want this unreported cash with them in order to bribe the officials for getting all the clearances and certificates. Even if the Stamp Duty is totally removed, I can bet that the cash component of buying a flat or house from builder will not go away.

nginx

1 year ago

The government wants its piece of pie from everything. We pay tax on our income, then we also pay tax on our expenditures. Its like we are getting taxed twice over and if calculated, I am sure those in the 30% tax bracket are actually giving away 50% of their money as tax every month.

If we buy a land/house we pay a mirage of taxes. If we eat in restaurants, we pay through the nose in taxes alone. If we purchase some goods, we pay sales tax. If we import something, the ridiculous customs duty will leave you penniless. Even a simple IMPS transaction has a Rs.5 charge + Service tax associated with it. Banks charge 2% to retailers for every card transaction. Where does the list of charges end?

Frankly cash based transactions will & should continue for as long as the government continues with its various scams designed to loot public money and hoard them in Swiss banks.

Parimal Shah

1 year ago

If you charge 14% service tax on credit card payment when due, what ever nominal incentive is given is taken away by a a greater amount as service tax.
If we want less cash and more card payments then service tax on banking service and credit cards should be discontinued.
-Parimal

Shirish Sadanand Shanbhag

1 year ago

As far as real estate is concerned, any rules that any Government may do, they will greatly remain on paper, more and more black money in Real Estate transactions will continue for ever, which we see from the year, 1990.

Nikhil Vadia

1 year ago

Most of the above things are already done. Property capital values are changed almost every year.

MRP based taxation is already tried and has failed. VAT collection at only one point is against the idea of GST.

Manish Soni

1 year ago

What about abolition of Benami registration of immovable properties - a major source of cash transactions and corruption?

TIHARwale

1 year ago

Property transaction tax will eliminate registering value below guidance value also and another important thing will be if income tax or transaction tax tax rate is pegged to a maximum of 10%

Are Automatic Transmission Cars worth it?
From sounding like lawn-mowers, automatic transmission vehicles have come a long way
 
The first time I drove an automatic car was in the United States, way back in the mid-1970s, I hated every furlong of it. The sheer loss of power when needed the most—while overtaking and on fast turns—was what kept me off automatics for decades. One needed that kick one got in the guts from manual gear-shifting. Recently, however, given the sheer number of gadgets inside cars and the multi-tasking expected when driving in North America, be it a mobile phone or in-car entertainment or just making sure that a multitude of laws are not being broken, automatic transmissions have become almost a necessity. In addition, rental cars seldom, if at all, offer manual options.
 
Here, in India, most automatic transmissions have been boring, at best, and tedious as well as difficult to maintain, at worst. This remains the case especially with some of the old style three- and four-speed automatics, where you can hear the engine whirring away like a lawn-mower while the transmission tries to figure out the ideal match required on our confusing driving experiences, with twisting roads, rapid stop and go, overloads being the rule rather than the exception and, most of all, dust playing a major havoc in everything connected.
 
However, over the past couple of years, automatic transmission has taken off and quite rightly so. Mainly being fitted out on smaller cars like the Celerio, K10 and Nano, these variants offer a manual transmission-like experience but also give you the liberty of working a lever and letting the electronics do the rest. Whether you are looking to buy a new car or not, do consider going over to a car dealership and taking a test drive, well before you close your options on it. It may just be worth your while.
 

Big Business

 
Resale of vehicles, whether stolen, damaged, seized for loan default, or simply abandoned and put up on ‘offer’, is big business. Global players have also entered the trade as the number of such vehicles available is running a close second to genuine used motor vehicles, and the interest as well as financial outlays involved are staggering, to say the least. 
 
While quite a few of these recovered cars and bikes make it to the scrap yard for chopping up, many re-enter the market; what’s even worse, their documents re-enter the market looking for buyers. The mismatch between the two, the document and the actual vehicle, is a fascinating story. The first level of due diligence includes matching the registration details with the engine number, chassis number and easily visible VIN (vehicle identification number). To put this in as gentle a manner as possible, these are easily manipulated and, often, do not tell the true story. There is, for example, no central database which can track the movement of a vehicle’s registration through different states or even regional transport offices within the same state. 
 
So, first things first; any vehicle which has changed registration numbers frequently since manufacture and first sale is to be researched deeper. How does an individual buyer research any further? Not very easily, as it happens. A corporate, on the other hand, will have the resources to:
a) Find out where the VINs are secretly stamped in some parts of an automobile. 
b) Find out the specific identity number of computer chips fixed in cars for a variety of purposes.
c) Track ownerships of cars from the register of ‘serial offenders’, an informal list which insurance companies maintain.
d) Dig out real service records for the vehicle as different from service record for a registration number.
 
The car resale market is changing too. The number of old cars being rejuvenated and sold with documents of new, stolen or destroyed cars may be reducing.
 
(Veeresh Malik started and sold a couple of companies, is now back to his first love—writing. He is also involved in helping small and midsize family-run businesses re-invent themselves.)

User

COMMENTS

Suresh

1 year ago

Where is the answer to the headline?

REPLY

Veeresh Malik

In Reply to Suresh 1 year ago

The eventual choice is a personal matter. Having said that, do take a closer look at the new-gen automatics? Hope that helps? Best regards and thank you for writing in.

Amit Choudhary

1 year ago

I am confused ! Was the article about manual vs auto or was it about the due diligence one should do while buying a used car ?
Looks more like an editing error to me. If this is intentional then whoa you could have done this as two separate articles. Don't you think ?

Anand Vaidya

1 year ago

Auto-trans: The problem in India is that cars with decent auto-transmission are rarer than chicken teeth.

Even established foreign brands like Toyota, Ford & Honda dumb down cars for sale in India by removing auto option or providing a very bad transmission (Suzuki etc)

Ankur Bhatnagar

1 year ago

Very poorly written article! Moneylife must exercise editorial due diligence.

REPLY

Veeresh Malik

In Reply to Ankur Bhatnagar 1 year ago

Dear Ankur, thank you for writing in, your wish is my command, please point out the specifics if you don't mind too much, and I shall try to do better. Best regards / VM

Ankur Bhatnagar

In Reply to Veeresh Malik 1 year ago

The other comments here amply highlight the issues in the article. To cite one, you write as the conclusion: "Whether you are looking to buy a new car or not, do consider going over to a car dealership and taking a test drive, well before you close your options on it. It may just be worth your while."

Is this the insight you wish to offer to your readers? It will help you a great deal if you ask someone in MoneyLife to critically review the articles before publishing. It is simply the process. Thanks.

c v manian

In Reply to Ankur Bhatnagar 1 year ago

Agree with you 100%. The article does not cover the statement/intention of the article and hence does not save any purpose. Moneylife must scrutinize published articles more diligently.
C V Manian

Banks Cannot Foist Credit Cards on You

Providing unsolicited credit cards, or enhanced credit limits without a customer’s request,...

Premium Content
Monthly Digital Access

Subscribe

Already A Subscriber?
Login
Yearly Digital+Print Access

Subscribe

Moneylife Magazine Subscriber or MSSN member?
Login

Yearly Subscriber Login

Enter the mail id that you want to use & click on Go. We will send you a link to your email for verficiation

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)