Cash may no longer be king as e-money emerges new ruler

The proposed ban on cash transactions above Rs 3 lakh may hit luxury goods, jewellery sales and real estate.

You have just received cash as gift on your wedding and decide to buy that Rs 3.5-lakh Chanel bag you have been eyeing for a while.

You walk into a store at a five-star hotel and pull out a wad of cash. But the salesperson refuses to accept it and insists that you either pay by card or transfer money online.

It could soon become a reality if the government accepts the recommendations of the Special Investigation Team (SIT) on black money headed by Justice MB Shah (retired) and ban cash transactions above Rs 3 lakh.

This could impact sales of luxury goods, ranging from branded handbags to cars and designer watches.

“No longer will people be able to walk into a luxury showroom and pay for these ultra-expensive items by cash,” says Amit Maheshwari, partner, Ashok Maheshwary & Associates.

Not only that. If you are planning a do, and wanting to pay the decorator, cook, make-up artist, musician, transporters, etc, in cash, it might get tricky. The amount one can keep at her premises is proposed to be capped at Rs 15 lakh. In fact, one may require prior approval from the Income Tax commissioner of the area to hold cash more than Rs 15 lakh.

“The proposal will discourage business people from doing large cash transactions and will bring down black money in the system,” says Kuldip Kumar, partner and leader, personal tax, PwC India.

Until now, whenever the I-T department found large accumulation of cash, people used to get away by paying tax and penalty on it. But things may change now.

The SIT has recommended that there should be a total ban on cash transactions above Rs 3 lakh and a law should be framed to declare such transactions illegal and punishable.

Currently, all transactions above Rs 2 lakh, irrespective of the mode of payment, require quoting of Permanent Account Number (PAN) and are subject to tax collection at source (TCS).

For a cash transaction, whether for hotel or restaurant bills, foreign travel or bank deposits, PAN is required for payment of more than Rs 50,000.

The tax department is also seeding Aadhaar with the PAN number to weed out multiple PANs. 

Real estate is another area where cash transactions happen frequently.

Although property transactions above Rs 10 lakh require furnishing of PAN, often builders ask for a portion of the payment in cash.

A prominent property broker in Gurgaon pointed out that all cash transactions don’t represent black money.

He added that under the NDA rule, there was a move to check flow of black money into real estate, thereby decreasing the volume and value of transactions to a large extent.

That, he said, had contributed to the slowdown in the realty sector.

If the SIT recommendations are accepted, the volume of real estate transactions may fall and the prices could show more weakness.

According to estimates, 40 to 60 per cent of property transactions, especially in land deals, happen in cash.

But there is also a view in the real estate industry that the impact may not be that big.

“Nowadays the purchasing patterns have changed, as developers themselves are keeping things transparent. The use of cash might be more in some land transactions but cash component in organised developer segment has greatly reduced. Most people go for loans anyway,” said C Shekhar Reddy, former president of Credai, a real estate association.

Real estate is seen as one of the sectors where black money has been most prevalent, according to Ankur Dhawan, chief business officer, PropTiger.

The problem, he said, was plugged in when “black money Bill”, passed by Parliament in 2015, drastically restricted use of cash in real estate transactions.

While he thinks restricting cash transactions to Rs 3 lakh may not bring major change in real estate industry, limiting cash holding to less than Rs 15 lakh will play an important role in plugging black money in the sector.

“This is because the buyer and the seller would be scared of holding and exchanging large sum of cash,” Dhawan said.

When it come to travel, Rs 3 lakh seems to be large enough for a family to spend on air tickets and hotel bookings, said Rajiv Kohli, senior vice –president, Indian Association of Tour Operators.

However, many others said, large cash transactions are very common in hotel bookings. According to Kohli, cash transactions have come down in the last few years. 

Earlier, when cash (usually black money) was paid for goods and services, the seller used to show the income as ‘received in cash’ and convert it into white money.

But the Tax Collection at Source (TCS) system reduced this practice and the ban on large cash transactions will reduce it even further.

Only small jewellers may accept cash and not show it in their income. But spending the unaccounted money in small amounts will be cumbersome.

The intention of introducing TCS was to plug use of black money, which has been successful to a large extent.

The sale of luxury goods has taken a hit and many well-travelled and effluent customers have chosen to shop abroad for these goods, Maheshwari adds.

While these steps are making it difficult for people to hold huge amounts of cash, there should be incentive for making payments through electronic mode, instead of charging additional charge, said Kumar.

Due to the additional charge on credit cards, many sellers insist on cash payments, he pointed out. 

(With inputs from Karan Choudhury and Nivedita Mookerji in New Delhi)