 "Cash, Demonetisation, Currency")
With the finance minister saying “demonetisation is the new normal confronting black money”, tax experts expect the government to follow up the note ban with more measures to curb high-value cash transactions.
High on the agenda are banning cash transactions beyond a certain threshold, restricting cash holding with individuals and industry, imposing a tax on high-value cash withdrawals, discouraging hoarding of agricultural income in cash. This would also require the government to take a fresh look at concepts such as inheritance tax and wealth tax, say tax experts. To make the fight against black money effective, there is a need to spruce up the enforcement machinery against tax evasion, experts add.
In July this year, the Special Investigation Team (SIT) on black money recommended banning cash transactions of Rs 3 lakh and above. It prescribed restricting cash holding with individuals and industry to Rs 15 lakh to curb illegal wealth. Soon, a senior finance ministry official confirmed publicly that the government was giving a thought to the recommendations of the SIT.
Any move to curb cash transactions and cash holdings with individuals and industry beyond a certain threshold would send the right signals in the current demonetisation drive, say tax experts.
However, tax lawyers and chartered accountants are divided over the issue to tax cash withdrawals beyond a certain threshold, as recommended by the Committee on Tax Administration & Reform Commission (TARC) in 2014.
“If there is a tab on cash spending, there would be an automatic reduction in cash withdrawals,” says Rakesh Nangia, managing partner, Nangia & Co. However, he is against imposing any cash withdrawal tax, which is akin to the banking cash transaction tax that was withdrawn in 2009 due to difficulties encountered by banks and bona fide customers.
Sudhir Kapadia, national tax leader of EY India, says there already is a requirement for banks to report all annual cash deposits of Rs 10 lakh in savings accounts and Rs 50 lakh in current accounts to the income-tax department. “There seems to be merit in the (TARC) committee recommendations to also include cash withdrawals, in addition to cash deposited to be reported to the tax department,” he says.
Mukesh Butani, managing partner of BMR Legal, is of the view that the long-term objective while moving to a cashless economy should be driven by behavioural change, than a disincentive tax of this nature.
“This move will only be effective when there is a deeper penetration of the banking system into unbanked cash-driven economy,” says Saurav Bhattacharya, partner-direct tax, PwC. Agrees Girish Vanwari, national head of tax, KPMG: “Given the level of economic inequality, the country may not be ready for this kind of tax at this point of time.”
Experts, however, unanimously support measures to discourage hoarding of agricultural income in cash. “The government should strictly insist that all agricultural produce be sold against payments through banks, demand drafts or crossed cheque,” says Nangia. However, Butani is quick to point out that taxing of agriculture income is a state subject and any such move needs to be reviewed from a constitutional empowerment standpoint. The political challenge to such a move may well make it a non-starter, say many tax experts.
Kapadia offers a way forward. There is a disallowance of cash payments in excess of Rs 20,000 under Section 40A(3) of the Income Tax Act. However, under Rule 6DD, there are exceptions prescribed for cash payments under various circumstances, including those for purchase of agricultural produce. “It is time to remove these exceptions and prohibit all cash payments in excess of Rs 20,000 for the purpose of claiming tax deduction. This will encourage recipients of such income to use banking channels more extensively,” he says.
Tax experts are again divided over the question of re-introduction of wealth tax and inheritance tax. Experts point out that the history of wealth tax in India has shown that the cost of collection exceeded the actual tax collected. Moreover, over the years, income-tax return forms have been amended to include details of various assets held by the taxpayer. “It is much better to make good use of the information so collected on the wealth held by taxpayers rather than re-introduce wealth tax,” says Kapadia.
Inheritance tax was known as estate duty, till it was abolished in 1985 by the Rajiv Gandhi government on the ground that it failed to reduce wealth inequality. “I am not opposed to the idea, but wonder if in a country such as India, this is an appropriate time,” says Butani. Inheritance tax is currently levied in several developed countries such as the United States, the United Kingdom, Belgium, the Netherlands, Finland and Germany. Australia and Sweden scrapped the tax, while China is yet to notify the rules.
Many tax experts say the government must follow up on the demonetisation drive, using the momentum to introduce the Goods and Services Tax regime, to deepen tax administration reforms. Bhattacharya says the government should focus its energies on better execution of existing laws to adopt a “zero tolerance” strategy towards tax evasion. Rather than bringing newer measures, the government should look towards deeper tax administration reforms such as taxpayer services, ease of paying tax, simplified dispute resolution, adds Butani.
