India Passes Bill Banning Cash Payments Exceeding $3,000

06.04.2017 • India

Vivek Kaul – Vivek Kaul’s Diary (India) –

In the budget speech made on February 1, 2017, the finance minister Arun Jaitley had said“The Special Investigation Team (SIT) set up by the Government for black money has suggested that no transaction above Rs 3 lakh should be permitted in cash. The Government has decided to accept this proposal.” Black money is basically money earned through legal or illegal means but on which tax has not been paid.

In the Finance Bill (which is what the budget is) that was finally passed on March 30, 2017, this limit was reduced to Rs 2 lakh. This has led to the addition of Section 269 ST in the Income Tax Act. This is how the Section 269 ST reads: “No person shall receive an amount of two lakh rupees or more- (a) in aggregate from a person in a day; or (b) in respect of a single transaction; (c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account.”

Basically, the introduction of Section 269ST into the Income Tax Act does not allow transactions of greater than Rs 2 lakh in value to be carried out in cash. On the face of it, like many other government moves in the past, this seems like a good move. Indeed, this seems like a move with noble intentions given that it intends to move people towards digital transactions. And as people move towards digital transactions, the number of transactions carried out in black will come down.

In fact, the history of the Indian government (and I don’t just mean the current one) is littered with examples of decisions carried out with noble intentions. But in the end these decisions either do not make a material difference or go against the people they are supposed to benefit. Much of my new book India’s Big Government-The Intrusive State and How It is Hurting Us deals with this basic issue.

Getting back to the issue at hand. What does the Rs 2 lakh limit on cash transactions really mean? You cannot receive more than Rs 2 lakh in cash from a single person in cash in a day. So, if you receive Rs 3 lakh from the same person during a single day, even for two or more different transactions, then a penalty will be levied on you.

As the newly inserted Section 271DA of the Income Tax Act points out: “If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt.” This basically means that in the above example, the penalty shall work out to Rs 3 lakh.

Further, the penalty shall also apply in other situations. Let’s say there’s a single transaction of Rs 3 lakh and cash payments are made on three different days. Even in this case, the receiver of the payment will be liable to pay a penalty.

The third situation is the most tricky of the lot. It limits cash payments of greater than Rs 2 lakh relating to one event or occasion from a person. The words event and occasion have not been defined. Now let’s consider a marriage. In case of a marriage, this would mean that any payment of more than Rs 2 lakh in cash cannot be made to one of the suppliers. If such a payment is made, then the suppler is liable to pay a penalty.

One could also interpret this section with regard to cash gifts that are received during the course of a wedding. One interpretation of this can possibly be that a cash gift of more than Rs 2 lakh cannot be received from a single person. This would also include gifts from “relatives” as defined by the Income Tax Act, who are allowed to gift any amount of money.

So far so good. As I said the intentions are very noble indeed. Nevertheless, the first question is how will the government and more specifically the Income Tax department figure out that cash transactions of greater than Rs 2 lakh are taking place? Typically, such large cash transactions are carried out only if the two parties do not want the government to know about it, and in the process avoid paying tax on the transaction.

How does Section 269ST change that in anyway? Let’s say you go to buy a luxury good which costs more than Rs 2 lakh. The shopkeeper may not want to take cash for an amount greater than Rs 2 lakh. Then the Section 269ST becomes fully useful. But one always has the option to go over to another shopkeeper who is willing to accept cash and fudge his books of account. My point is that this new section will not have a major impact on black money in India, its noble intentions notwithstanding.

Also, the Section 269ST and or any other move of the government, doesn’t do anything regarding the demand for cash as a form of payment. This was and continues to remain the main problem when it comes to black money. Take the case a real estate builder. If you want to buy a flat, the builder will more likely than not demand cash from you. What will you do in such a situation? Tell him that under Section 269ST he is liable to pay a penalty if he receives a payment of greater than Rs 2 lakh?

Why does a builder take a portion of the payment when he sells a flat or a house, in cash? I think it is very important to understand this. He takes a payment in cash because he needs to make payments in cash. He needs to pay his suppliers in cash. But more importantly he needs to pay politicians and bureaucrats in cash.

Unless a builder has politicians and bureaucrats in his pocket, it is very difficult for him or her to be in the business of real estate, given how complicated the regulations governing the sector are. The speed money paid to politicians and bureaucrats essentially helps builders stay in the game. And this speed money cannot be paid in cheque or through NEFT/RTGS/IMPS and so on. It has to be paid in cash.

And this cash can only come from the buyer who is buying the flat or the homes that the builder has built. Unless this nexus between politicians and builders is struck down, the government can keep coming up with all the new sections and all the new changes, the demand for cash is not going to go anywhere.

As I keep saying, this can only happen if the system of electoral financing in India is cleaned up. Given the high cost of elections in India, the politicians need cash. And the builders and the corporates provide this cash. And there is nothing that the government has done on this front till date.

-Read more at www.equitymaster.com-

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