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April 6, 2015
To Sallubhai with Love
May 8, 2015

Connecting the Dots

It has almost been a year since the NDA formed the government and Mr. Narendra Modi became Prime Minister of the country. While everyone is jumping the gun in asking for or preparing a report card, I’m going to try and analyze the direction this government is taking the country into. Rather than look at effectiveness of newly launched schemes or the results a fresh thrust to earlier schemes has brought, which would undoubtedly be a foolhardy attempt this early, I’ll look at the various steps and try and look at connecting the dots.

Lets look at the admirable work by the PM in the push to open zero balance bank accounts for everyone and linking it with the gas subsidy. Not only has the subsidy leakage (which was effectively red money) been reduced but has added to the liquidity in the market (the RBI has helped by reducing the CRR too). Another side effect (+ve) of this scheme would be that soon daily wage earners would be able to accept payments directly into their bank account. Bear in mind this would be the unskilled workers that would have bank accounts, the higher up the skill chain you go the more easy it would be to find people with bank accounts.

Talking of the Benami Transaction (Prohibition) Bill to be tabled it is a way of applying a stopcock to the flow of black money in the realty sector. Prohibiting advances of more than 20000 Rs. in purchase of immovable property is a step in the right direction, but as we’ve seen in the past illicit money would be paid wherever illicit money can be spent. However the penalties being as steep as they are in this case (upto 7 years) should act as a deterrent.

The Gold ETF scheme where the FM is happy to pay out an interest on the Gold held is also a game changer. India is a net importer of Gold and this affects the CAD a little too much for anyone’s liking. The consumption pattern of gold in India is to buy and save for future generations where the appreciation in value is a reason enough to block funds in a precious metal that spends majority of the time in safety deposit lockers. An alternate use of Gold is to park Black Money.

With interest being offered on ETF it can act as an incentive to limit physical gold purchase. Along with the positive effect on CAD it will also switch over the black money purchase to interest earning ETF purchases. (Yes I do agree that the jewelers play a key role here).The proposal by the FM on Pan card requirement for transaction over Rs. 1 Lac has the jeweler community worried about loss of sales. (Another push required by the govt towards pan cards like the Jan Dhan Yojna) High-end retailers wouldsee a similar impact on their sales. The LV country head to name one would undoubtedly be worried about achieving his sales target. The statement by FM regarding settling hotel bills over 5000Rs using cards is another such move to curb black money spend.

As any CA worth his salt would tell you the best way to save tax for a company is increase expenditure. A way would be artificially increasing the number of employees like Satyam did (Jan Dhan Yojna stopcock anyone), or inflating purchase bills which would lead to paying extra tax in the form of VAT, CST, Excise, Service Tax etc soon GST (albeit less than Income Tax) not to mention your vendor fighting to curb his excess profit there, or increasing direct expenses via power cost (transactions over 1 Lac requiring pan Card) limiting you to the industry standard profit ratios. (See there is a reason why most returns are being filed online) This would be the highest contributing factor in stopping the flow.

So after making the effort and covering your tracks extremely well you’ve built up a nest egg away from the taxman’s eye But even after all this if you are unable to buy the diamond necklace at the local jeweler for your significant other or the Fendi sofa for your house, which you cant pay using cash what would you do with the black money you’ve carefully generated and kept away from the eyes of the govt. Sure you’ll be able to go on a multitude of long drives filling fuel using cash but staying in multi starred properties might again need a card.

Foreign trips I hear you say. Well recently there was a lot of backlash by the public regarding a move by the CBDT of asking for your foreign trip details in the ITR. While the matter is being looked into it is a futile exercise because the passport that you flash at the counter is invariably an id that is presented as address proof when you get a pan card that is inevitably linked to your ITR. Just a matter of connecting the dots I feel, which was the prime objective of the move by CBDT in the first place.

Even if you purchase a ticket via cash and then manage to carry cash without declaring it out of the country (or have it delivered to you somewhere cough *hawala * cough), buy luxury items and walk through the green channel successfully then I’d like to remind you about the case of Mr. Nanda of a certain company called Escorts.

Consider being given a task to clean a waterlogged basement with the water valve open would you rather grab a mop or a wrench to close the valve? Ideally you would like the option of working on both which thankfully has been provided to this government with the court monitored SIT. However the government still has to wrench the valve closed. And the tools mentioned above go some way in tightening the valve to stop the flow.

This government is going to connect the dots sooner rather than later and moving towards a cashless economy would only speed up the process further. So in all probability it will leave you with a question to ponder

Is the juice worth the squeeze?

P.S. – I havent talked about the impact of MUDRA bank which is a refinancing institution targeted towards people unfunded so far to borrow the phrase of the FM as I’m currently unaware of its reach and operation

P.P.S. – If you spend cash to buy necessities then you are certainly not the target of the above bills

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