The following Video shall reveal some very Interesting stuff about Money and give the readers some delightful food for thought…! and it will present an interesting perspective of demonetization.
Points to Ponder upon after Watching the above Video…
Money on the move has no fixed abode. From one wallet to another, from one shopper to the next, from one bank account to another, that is the life of money. But curiously, many of us want to cling on to every bit of money that we may have.
It is the greatest myth that Cash is like any other asset. Infact, Cash was never meant to be kept as a Commodity but it was always meant to be used as a “medium of exchange” for goods and Services to be received. Have you ever come across of an investment in Cash kept in locker/home grow or provide returns ?
This is because Cash/Money in Bank has a peculiar feature:
A Single Note of Rs. 1000 is worth Rs. 10,00,000/- if it passes through 1000 citizens across the country in a year and is worth only Rs. 1000 if it is kept idle in a locker. This is called the Velocity of money.
This is not the case for any other asset, lets say Machinery! If a single Machine is transferred through 12 people in a year, it will still give almost the same level of production.
Further, it is another myth that Rs 1000 Note in parallel economy will result into loss of revenue by Government in form of Income Taxes of Rs. 300/-. This is because Government has infact lost its due taxes almost each time whenever this same Rs. 1000 Note has passed from one person to another. This should also give a partial answer to Rahul Gandhi and Arvind Kejriwal about why there was a need to bring another Scheme of Income Disclosure at the rate of 50% Tax and 25% interest free deposits.
I agree that dishonest Person should be punished but there is another peculiarity of cash which is Cash leaves no trails!
Say for example, I have two friends Ramlal and Shyamlal.
Both went to Casino in Goa this Diwali and took casino chips of Rs. 10,000/- at the time of entry. They played only Slot games or Roulette and one of them accumulated Rs. 10,00,000/- worth of chips after having a series of wins and redeemed them in cash while other friend did not win and returned empty handed. Now both of them just came back on 5th November and after the announcement of Demonetization, the friend who genuinely had winnings from casino deposited Rs. 10,00,000/- and opted to pay tax @ 30 % which is the prescribed tax rate for winnings from Casinos. The other friend who has not won anything in casino also deposited Rs. 10,00,000/- of his Black money earned in previous years and filed his return of income stating that he also has won Rs. 10,00,000/- as winnings from casino and paid tax @ 30% thereon.
Now I agree that dishonest person should be penalized with 85% tax and penalty but can the readers identify who is dishonest ?
Can the Income Tax Department be able to identify the dishonest one when the case comes for scrutiny after a period of two years ? Even if the answer is yes based on some inquiry ( I doubt if casino will have CCTV footage of 2 years old!), still there is a possibility that you might penalize even the honest persons who have genuinely won in casino by asking him to prove the impossible.
And hence the new IDS Scheme called Pradhan Mantri Garib Kalyan Yojana may be a welcome move to encourage the dishonest to come clean and bring the money back into circulation which ultimately shall help in increasing the velocity of money and also reduce litigations.
However further, I am of the opinion that the retrospective amendment in Section 115BBE of the Income Tax Act,1961 made by the present Government ( may be owing to pressure from opposition or some immature advisory ) to tax unexplained cash/receipts at rate of 85% may lead to disastrous outcome because honest citizens may also fall prey to its draconian conditions.
Lets take another example. Say I have two friends Ramlal and Shyamlal. One of the friend started teaching CA students and after pursuing this noble profession of teaching for six months received fees of Rs. 6,00,000/- in first week of November 2016 which he deposited on 10th November 2016. Another dishonest friend who had accumulated black money of Rs. 6,00,000/- also deposited the same on same day and wrongly showing it as tuition income in his return of income filed subsequently.
Now the Government wants to punish the dishonest by taxing him at the rate of 85% but what documents can suffice the officer? Can you identify who is the dishonest one?
If only names and confirmation from students would be sufficient as proof then both friends would manage to arrange those documentary evidence. And if both are asked to prove the source by proving the entry of cash paid in books of accounts of parents of those students then even the honest friend may end up paying tax at the rate of 85% because at the time of admission he cannot be expected to step in the shoes of Income Tax Investigation Officer and ask each parent who has come for admission to submit their accounts of current year and also getting it checked later!!
According to my opinion and suggestion, there should have been inclusion of three definitions in Income Tax Act following demonetization to provide equitable justice and fair play namely
Unaccounted income earned in current year from legal Business – 30 % tax and no penalty because the act of concealment is not proved to be committed till you have filed your return of income and due date of filing return of income will be 30th September 2017.
Unaccounted income earned in previous years from legal Business – These persons can Opt for Pradhan Mantri Garib Kalyan Yojana or be prepared to face Tax , Interest and Penalty at the rate of 200% if caught.
Unaccounted income earned from illegal business for example Smuggling, Bribe and corrupted practices – No immunity and face the consequences of Income tax Act , Money laundering Act and Benami Transaction Act.
Though I am just a common man and a practising CA, It is my earnest wish if the above suggestion can reach the Honourable PM Narendra Modi and necessary amendments are made in subsequent budget to avoid hardships and unnecessary litigation.
Coming back to the crux of the above video , a million dollar question still remains that “Will demonetisation help to increase the velocity of money ?”
Velocity of money” is a term used to denote the number of times a unit of money in an economy changes hands during a certain period. By ‘money’, it does not mean the cash that we exchange in day-to-day transactions. Instead it is broad money where you also include bank deposits, post office savings and other bits and pieces of financial savings.
It is true that the economy may surely be benefited if the “Velocity of Money” increases and theoretically the move of demonetization and move towards cashless economy should help to increase the Velocity of Money but it cannot be proved with certainty because we never knew the velocity of money in parallel economy because those transactions were never captured in accounts or public records. We do not really know the ‘rate of corruption’ in India or how fast corrupt Indians churn cash. Probably a black money holder would be interested in moving cash into consumption quite quickly, in which case this numerical would be higher. Or if black money holders are keener to stuff all their black cash under carpets or lockers and refrain from spending them too frequently, then it will be a smaller number. Thus we just don’t know what the macroeconomic effect of demonetization is going to be. It’s something we’ve just got to wait and see about.
Mathematically, Velocity of money is a derived statistics which can be arrived by dividing the value of GDP with the value of money in circulation. As an analogy, the sudden lowering of GDP due to demonetization can be offset if simultaneously we can increase the velocity of money.
However, the task of the Government as well as citizens is not going to be easy because as I said earlier , Cash leaves no trails. Hence it is in the interest of the Government as well as we common man to adopt to cashless means of doing business and encourage everyone to use banking route as much as possible.
At the same time, it is expected that Government should also supplement the move of demonetization by resorting to various other measures like :
Incentivising Digital Payments and payment through Banking route and at the same time the stringent the cyber laws and focus on its implementation.
Reducing the interest rates for Loans and further making sure that Loans are provided after proper due diligence with negligible chances of NPA.
Limiting the withdrawal in cash through some reasonable and legal means without causing any hardship to the citizens.
Reducing the rate of Income Tax because once the money is into banking channel, the Government is going to get tax each time the money is circulated and value addition is done as shown in video above.
Regulation of Investment in Gold and Real Estate and other areas where black money may be parked.
Bringing Political parties under the tax ambit and system of disclosure of the Amount and Names of Donors.
I again express my heartiest gratitude to all my Teachers who have selflessly shared their knowledge and some fellow members of CA fraternity who are playing an active role in creating awareness and educating Common men about the positive consequences of Demonetization true to the Jewel crowned to the profession as “Partner in Nation Building” and I would therefore like to advise the citizens not to sell the notes at discounted prices or deposit the cash into bank accounts of other benami persons in fear of penalty. Further, do not claim any bogus expenses or bogus loss to gain more trouble. Do not manipulate accounts by creating bogus cash on hand. Be sporty and pay tax honestly to buy peace of building capital.
CA Mehul Rasesh Shah
Social Link : https://www.facebook.com/mehulca
PS : I was really overwhelmed to receive thousands of mails from across the world after the “Open letter to Arvind Kejriwal” went viral and from my hearts of hearts express my deep gratitude to those who showered their blessings and encouraged me to keep writing for the common man and hence this above Video explaining the new concept of “velocity of money” and explaining the pros and cons on the latest position of law relating to Income Tax.