Part -2: Breaking the Status Quo
Question: How to get out this vicious cycle of cash where everyone is so comfortable dealing in cash that there is no real compulsion to transact electronically or through banking channels?
Answer: Rock the Boat. Give this vicious cash cycle a shock, a Jolt…!!! tell people that they cannot continue to enjoy Cash transactions without being accountable. But how… maybe can we educate the people… maybe we can make them aware of the larger ills of cash transactions? Yes, we can. But does that change? I don’t think so, I am so comfortable dealing in cash then why I need to get into all the hassles of Banking Channels, Electronic Funds transfer, costs, accounts, taxes. Most importantly… what do I do with all those large bills I got with me everywhere…!!! Where do I spend them? How do I put that cash back into the system without getting into trouble or paying Taxes…!!! These are now the new questions. So, nothing happens. All these awareness program end up as wasted money with little or no real benefit to the Government.
Now, as a desperate measure, the Government resorts to shock the Cash Cycle with “DEMONETIZATION”. This Shock treatment is needed as the patient is getting into the state where it is not responding to medications and other therapies. Time is to take out the Defibrillator as the patient is sinking and needs to be revived. That’s exactly what the present Government has done. It has given the Cash system such a huge jolt with demonetization of two largest denominations that it has shaken the belief of all that “Nothing will be done… this will continue like this forever…”. It was announced in a way that it did not give anyone any time to think about the ways and means or to find out the loopholes in the system to preserve their Cash Wealth or to channelize the cash systematically in the Banking system.
As consultants, we are often asked this question by the businessmen – “How do I push my customers to use electronic means or Cards to pay for their purchases as I am doing most of my business in Cash and Cash is expensive to manage”. One of the measures we recommend is to “make cash less convenient to use”. Make the queue that is accepting Cash the longest. Provide less counter accepting cash and more accepting Plastic or Mobile Payment. People with Cards or Mobile wallets will be motivated to use the shorter queues to save time and inconvenience. The Indian Government has done the same. They have made Cash Conversion & Cash withdrawal a lot inconvenient. Now, all those Tax paying population who have Debit/Credit Cards, Mobile Wallets are at peace enjoying the privilege of queue-less counters to pay while the Non-Tax Paying population is standing in long queues for cash deposit and notes exchange. People are raising hue and cry about the queues, they inability to pay for basic expenses, medical bills, school fees, food purchases, transportation etc. without realizing who is the culprit in the first place.
Now let’s come back to basic question – “What is Black money” ? Is that all these volumes of cash are black money or it is just that money with people who are doing illegal business or the corrupt businessmen, politicians, bureaucrats, doctors, etc.
The black money is defined as “In India, black money refers to funds earned on the black market, or money on which income and other taxes have not been paid”. Now with this definition and the background of Cash Economy we got in Part-1, we now know that in most cases, where the transaction is done in Cash, some form of Tax is avoided… be it VAT, Service Tax or Income Tax or any combination of it and hence the money made through such transactions is “Black Money”. Is that always true? Not always but in most cases, it is true.
Let us take a few examples:
- Case-1: A goes to a shop to buy basic needs. The shopkeeper Mr. X, runs it as his proprietary business and is not accountable to anyone for the business performance. So, Mr. A buys stuff from the shop and since the transaction is in Cash, Mr. X does not feel obliged to issue the invoice for the transaction. It all looks and sound fair. But now, Mr. X has two challenges with such transactions… first is he has to pay his suppliers and second is how to keep an account to see how the business is performing!!! The answer to first is easy, Mr. X buys his stuff from the supplier in Cash and does not ask for any invoice and hence No VAT or Tax. It reduces his costs in terms of tax and increases the profit margins. Second problem is bit complex… so Mr. X hires an expert who advices on two set of books. One set of books for himself to assess the performance of the business and second set of accounts to show to authorities and government. In first books, he records all Cash Ins and outs and hence it’s easy for him to calculate his profits. But the second set of books are more complex. He needs to issue receipt, collect VAT from customers, deposit that VAT to government account, maintain sales and purchase accounts, show profit and pay tax on those profits. Too much hassle for the business as he knows he is doing well and he is not obliged to maintain all those records for someone who never bothers to check on him except random checks and it is always possible to pay some cash bribe and defer submission of accounts for some more time. So, Mr. X does not keep all the records and maintains just enough to satisfy the authorities. Now the Question is… is that money he has earned with hard labor is all white? I am afraid NOT. If he has collected tax from the customer but did not deposit it with Tax Authorities, then all that money he earned is definitely Black. If he has earned profits from his business but did not show it in the books and did not pay tax on it then all his profits also account as Black Money. And all this money is in Cash either in his safe at the shop or at his home. He may channelize this cash in other transactions that would get him some returns as well.
- Case 2: A go to a shop which is organized shop. It means that, the shop owner is different from the manager of the shop and the manager is accountable to the owner for the performance of the business. So, owner (call him Mr. R) mandates the shop to keep track of each sales/purchase transaction so that, he can monitor the business performance. The cashier here, takes the money from Mr. A and since he has to issue an invoice for the purchases, he includes all the Tax amounts he has collected on behalf of the government from the customer in the invoice. Customer pays in Cash or through Credit/Debit Card as the shop allows him to do so and receives his goods and leaves the shop. Now, irrespective of the transaction type whether cash or card, this transaction will automatically go to the accounting books, it will be accounted for amounts received, tax collected and profits/margins made. The tax has then to be deposited with Authorities and in turn, all the cash will be deposited with the Bank and the shop can purchase goods from its suppliers with Invoices and applicable taxes paid. Since it is a legitimate transaction, shop can negotiate Credit terms and better prices from supplier keeping his costs less. In this case, all the profits of the shop will be accounted and hence, shop will have to pay Income Tax on those profits. Now the question: All this cash collected by this shop is White or Black…? Answer is “White”. All the income the shop owner has is Black or white… Again, the answer is “White”. Is that cash dirty? NO way. All the cash in the shop will very likely be deposited with the bank for safety reasons and also, it will earn some interest and credibility for the business.
In the above two illustrations, if you see, who has been the primary beneficiary of the Cash Transactions? Is that Mr. A or Mr. X or Mr. R? Answer is Mr. X. He has collected tax from the customer but did not deposit it with authorities. He made profits from the business but did not pay any tax on his income. So, he has benefited both ways. Mr. A – the consumer is not getting any extraordinary benefit as he got this purchases on the retail price ascertained by the manufacturer which is usually inclusive of all taxes. This is how it is normally mentioned on articles as “Maximum Retail Price inclusive of all taxes”. So, that the consumer is protected from cheating shopkeepers for charging extra as taxes. In this whole network of Unorganized business, the biggest loser is the Government and the gainer is that shop owner.
Now, let’s go back to real life. How many shops are part of organized sector and how many are unorganized sector. I see most of the shops that we visit are usually unorganized retail shops. Meaning, the owner of the shop is the one who manages the shop and hence controls how the accounting it done.
- How Cash-less transactions will help this sector? This sector is only comprised of about 40% of the overall economy.
- Well we have not talked about the rest of 25% of non-Tax Paying population. Who are they and how they can be brought under tax net?