Thursday, October 13, 2011

The Colour of Money

(GREAT NEWS: WROTE THIS YESTERDAY. TODAY'S PAPER REPORTS THAT PROPERTY SALES THROUGH POWER OF ATTORNEY NOT VALID. MUST LOOK AT FINE PRINT) WITH A LITTLE HELP FROM THE TAXMAN.. The government rules are cleverly drafted with the support of lobbyists who ensure that black money generation and storage is not disturbed. Gold has been a traditional place to park one’s unaccounted money. Gold, diamonds and other items of jewellery have been the eternal favourites of anyone searching for a way to dispose of the bundles of cash. Apart from money under the pillow not earning anything, cash is also unwieldy. Of course, one can buy land, finished property etc., Land can be easily bought under a Power of Attorney from the seller and never registered. It can change hands several times before it is finally registered. This is a convenient way to park black money. It is not too difficult to keep the document in safe custody with a lawyer (hopefully the lawyer will not diddle your successors out of it, should you cease to be) and ensure that the taxman does not get his hands on it. And land is a ‘state’ subject. It is unlikely that any state government will make Powers of Attorney invalid beyond a time limit when it comes to land dealings. If the tax authorities want, they can plug this loophole simply by saying that the last registered name continues to be the owner for all purposes and that powers of attorneys for land sales are not valid without the attorney holder being registered as the legal owner for all purposes. Most of us today find it difficult to invest even a rupee without a PAN card issued by the tax department. The tax authorities require you to have a PAN card reference if you invest more than fifty thousand rupees in mutual funds. Till May 2011, there was no requirement for anyone to show a PAN card for buying gold or jewellery. One could do the entire transaction in cash. Some jewellers would ask for some name/address and you could write anything there. He was more interested in completing the sale rather than finding out about who you were. And dealing in cash had its advantages. No taxes or levies. No income tax on profits that the seller made. If the tax department ever tried to match the gold purchases with the invoiced sales and tax reference numbers, the results would be interesting. If you hold any gold or jewellery, you are supposed to pay wealth tax on it, subject to some exemptions. Wealth tax is wonderful. If you have any assets (gold, jewellery, automobiles, second or third homes etc) in excess of Rs.30 lakh, the government gets one percent of the excess over 30 lakh because you are ‘rich’. Of course, financial assets (stocks, shares, mutual funds etc are exempt from this). Of course your accountants know more than fifty ways to leave your taxman (with apologies to Paul Simon). You can always get ‘gifts’ from friends and relatives on various occasions and if you have some overseas so much the better. You could even ‘buy’ a prize winning lottery ticket! Now, the tax department has cracked the whip. It says that if you purchase jewellery or gold for more than rupees five lakhs (500,000 Rs) in one go, the seller must have a copy of the PAN card of the buyer. The wordings are very clever. It (Sec 114B of Income Tax Rules)says Every person shall quote his permanent account number in all documents pertaining to the transactions specified below, namely (many things are listed) and the operative one here is: payment to a dealer,— (i) of an amount of five lakh rupees or more at any one time; or (ii) against a bill for an amount of five lakh rupees or more, for purchase of bullion or jewellery: The other thing is that you can buy it in CASH. So, if more than five lakh, if possible you could split it in to convenient amounts. Indian gold imports in this fiscal could be anything between 800 and 1000 tonnes. At $ 53,000 per kg, 800 tonnes would be 2,12,000 crores!! This is almost 18% of the total budget of the government or more than one thirds of the tax receipts!! I do not have figures of diamonds, gems etc. Add those and it could be some mind boggling sums. How much of this is money that has evaded the taxman? Less than half? More than half? CASH as a medium of exchange is encouraged by the taxman. The only limitation is that if you have a business expenditure that is more than Rs.20,000 and in cash, it is not allowed as a business expenditure, unless there is a valid explanation. So, there is no bar on CASH SALES by anyone. So, one must compliment our tax authorities for leaving enough room for tax evasion. It also shows that they are serious about black money. Can we ask for more encouragement? We must also give thanks to bodies like the Institute of Chartered Accountants who help prepare draft legislations, the lawyers who ensure loopholes and above all, the politicians who ensure a way out of all difficulties. After all, who wants to pay tax? R. Balakrishnan October 13th, 2011