Tax collected at source: Why targeting cash transactions will not end the black money menance
The lasting solution to the vexed problem lies in discouraging cash itself by going digital at least for large transactions but that is a long haul
Tax collected at source (TCS) is of recent antiquity having taken birth three decades ago in India unlike its more omnipresent cousin, Tax deducted at source (TDS) which harks back to the origin of taxation itself. Section 206C enshrining TCS was written into the income tax law to reach out to the hard-to-tax categories especially the forest mafia thriving on contracts given by state governments for country liquor, timber, tendu etc. Their income has always been estimated to be sizeable but they had been successful in giving the taxman the slip. It was against this backdrop that TCS was mandated. The small percentage collected from them in addition to the sale price brought them into the tax registers. Thus they were made to file their returns willy-nilly.
Later on it was extended to the city parking mafia which too till then gave the taxman the slip while holding car owners to ransom. So far so good though no statistics are available on how much tax has been collected from these hard-to-tax categories.
Having tasted limited success in bringing the notoriously hard-to-tax categories into the tax net, the government decided to extend the concept to cash transactions in general given the fact that apart from those operating in the dark dense jungles, those operating in broad daylight also thumb their noses at the taxman through cash that confers anonymity unlike transactions routed through banks that leave audit trails.
Anyone paying for goods or services in cash in excess of Rs 2 lakh per transaction has to pay in addition a 1 percent tax (TCS). From 1 April 2017, this rule applies to jewellery as well on which hitherto the cutoff point is Rs 5 lakh. At the risk of being branded a Cassandra, I must set out the reasons why the move would be a damp squib.
1) For motor vehicles the requirement to collect tax at source kicks in at Rs 10 lakh level but it makes no distinction between cash and cheque purchases. Ditto for payments made by forest and parking mafia. But for all other goods and services the TCS regime applies only on cash purchase of Rs 2 lakh and more. The problem lies precisely here;
2) Those buying jewellery stop short of the danger mark. Suppose they have a jewellery budget of Rs 5 lakh post 1 April 2017, they would merrily hop into three showrooms in Chennai’s Usman Road for example. Divvying their purchases among three showrooms with none getting more than Rs 2 lakh of business ensures that the TCS scheme has been halted in its tracks.
3) And if a particular showroom is your favorite may be for its name or quality or honesty, still there is no problem. You can visit it on three successive days to achieve the same results. What the heck, many obliging jewellers bend over backwards to please their cash customers by sparing them of the burden of three visits by making three separate bills raised on successive dates even though you visit them but once.
4) The above cozy relationship between the wily jeweller and his cash customer might be somewhat checked if the requirement were to aggregate the cash purchases made during the year and apply the TCS regime on such aggregate purchases and not on individual transactions. But in that case cash customer would simply start patronising a different jeweler each time.
5) The TCS regime might register a modicum of success where goods and services do not lend themselves to division into smaller units. For example a person buying a car for Rs 6 lakh in cash cannot go to two car dealers unlike in case of jewelry where one can patronise more than one jeweler.
The bottom line is not very encouraging for the government. TCS on cash purchases is hardly the way to fight black money. The lasting solution to the vexed problem lies in discouraging cash itself by going digital at least for large transactions but that is a long haul. A beginning has been made in Budget 2017 by prohibiting cash transactions in excess of Rs 3 lakh which limit lends itself easily to violation through imaginative accounting and multiple transactions as explained above with regard to jewellers.
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