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Is the present State of Economy manmade or Natural ?

by parth@logicwind.com

If the whole world is looking upto India as their prospective market, then how can our Indian economy crash?

Is the slow down of economy man-made or natural ?

During Demonetisation , I had tried to explain the concept of “Velocity of Money” through an animated Video and had stated that the success of demonetization would depend largely on the effect on the velocity of money in the post demonetization period.

Learn the concept of Velocity of money and its effect on Economy

In this article, I would like to extend my views on the present state of economy in continuation of the said video.

Though the good “political intent” of the present Government cannot be denied and most of their actions are steered towards the best interests of the nation, but it also seems that the Government lacks smart and intelligent advisors  leading to slow down of economy.

One biggest blunder which the present Government is making is the assumption of “complete parallel economy”

We need to understand that parallel economy is just theoretical and “physical money” or “cash” per se cannot be black or white.

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. 

“Cash/Money in Bank” has a peculiar feature compared to other assets. If a Machine is transferred through 12 people in a year, it will still give almost the same level of production, but this is not so in the case of money!
When Rs. 2000 Note flows in an economy hundred times in a day, it gives 100 people satisfaction while going home that they have earned Rs. 2000/- and applied the same in stuffs which gives them happiness and the total value is worth Rs. 200000 showing signs of a healthy economy

But it is natural that out of these 100 people transacting in money, some 90 people may account for the money transaction and some 10 may not account for the same but the Government needs to realize that in order to not allow these 10 transactions going unaccounted – the stopping of the flow of all the 100 transactions is not the solution which ultimately leads to economic slow down and getting the remaining 90 people to go out of business !

Let me explain this with a real life example.

Lets say, when a consumer “A” may buy Jewellery worth Rs. 2,00,000 in cash, “A” may be using his unaccounted money but the receiver Jeweller “B” deposits cash into bank by invoicing it in the name of some “X“ and pays due income tax on the same.

Now the the jeweller B subsequently pays its job-worker “C” for their job charges by account payee cheque and after deduction of 1% TDS which ensures that job worker shall pay taxes on the same and out of their job-charges credited in its bank, “C” would pay salary to its individual employees “D” by cheque who shall also file their returns. The individual employees “D” shall now use this amount to consume various services like petrol , e-commerce shopping while making digital payment through Mobile wallets and hence these moneys are always accounted.
Now assuming that whole trail of money transaction as described above has happened on the same day, A,B,C and D all would go home happy and the value of Rs. 2,00,000/- would be Rs. 8,00,000/- at the end of the day and the Government would also get its share of direct and indirect taxes on each transaction total amounting to Rs. 8,00,000/- . The only Revenue leakage was the tax lost on the source from which person A has earned Rs. 2,00,000/-. Sometimes, even “A” who has accumulated past savings does not know whether the amount spent by him on buying jewellery is black or white and as I said , the biggest mistake which the present Government is doing is the doubting of the very first transaction of consumers like “A” who then loses his purchasing power due to tax terrorism and uncertainties in law and which ultimately results into lower velocity of money because none of the transactions shall happen.

In other words, earlier the Rs. 1000 Note used to travel something like this in an Indian economy.

BLACK, WHITE , WHITE , WHITE, WHITE , WHITE, BLACK, WHITE...

However, due to immature steps of the present Government during the post demonetization period and the hasty implementation of GST, the new Rs. 2000 Note now travels in the following fashion

BLACK, IDLE, IDLE, IDLE IDLE, IDLE , IDLE , BLACK, IDLE ,IDLE… 

And this has lead to massive recessive and liquidity crunch wherein the businessman are sitting IDLE!

While some notable reforms are made by the Government through the introduction of RERA and implementation of Insolvency and Bankruptcy Code which were necessary irrespective of its negative effect on the velocity of money, but as a Chartered Accountant practising into Income Taxes, if I am to suggest one step to increase the speed of money which will automatically boost the economy, it shall be the –

“Removal of the draconian provisions of Section 115BBE under the Income Tax Law which was amended during demonetization in a very insensitive manner”

The citizens of India has not yet tasted the venom of this amended draconian law of Section 115BBE because it is made applicable w.e.f A.Y 2017-18 and the scrutiny of the cases of the said year are under assessment and the ill-results as envisaged by me shall come by December 2019 if corrective steps are not taken.

What is Section 115BBE ?

Section 115BBE of the Act, as amended by the Taxation Laws (Second Amendment) Act, 2016 w.e.f. A.Y 2017-18 states that if a taxpayer fails to prove the nature and source of credit in its books of account or the explanation offered by him in respect of any credit is not satisfactory in the opinion of Assessing Officer, he shall be liable to pay effective tax at the rate of 77.25% even if he has offered the said income in his return of income !

For example, lets say that one of my friend “V” started teaching CA students and in pursuance of this noble profession, he  received fees of Rs. 11,00,000/- in cash which he deposited in the bank account and offered the same for taxation in his return of income as tuition fees. Now at the time of income tax scrutiny, the provisions of Section 115BBE shall vest the Income Tax Officer with unfettered powers to reject any explanation, being not to his satisfaction. After two years, my friend may be asked to produce the parents of the students before ITO to record their statement. The parent shall be asked to show the entry of tuition fees paid in their books of accounts and in order to save his skin, the said parent would never turn up to confirm the transaction or say that his son never studied under that teacher. Ultimately, my friend “V” shall be asked to pay flat tax of 77.25% on his income of Rs. 11,00,000/-

On the contrary, my other friend “U” who claims to have won Rs. 11,00,000/- from casino and betting will just pay tax at the maximum rate of 30%.

This provision of Section 115BBE shall affect any taxpayer into any business where there are cash sales involved and the Income Tax Officer has suspicion that the cash is not arising out of regular business.

In case of earlier example of Jeweller “B”, now B has to file confirmation from customer A ( which is unlikely) and on failure to do so, the Government shall fasten B with 77.25% tax. Thus by resorting to such harsh measure, the Government is stopping the whole flow of money from A to D to all leading to decrease in the velocity of money and rather the above provision is encouraging the parallel economy as now the jeweller B shall not deposit the said cash in his accounts though it wants to pay tax ( at 30% and not 77.25% ) and now the money will always remain black money and even the Government will lose its share at each time the money flows from one person to another.

Talking about corruption, the mentality of present tax-payers of “New India” is such that if an option is given to them to pay 30% tax or to pay bribe and reduce tax to 0% , I am very confident the citizens of New India would opt to pay 30% tax because they trust this Government blindly and they trust that the Government shall use their hard earn tax money for the betterment of the nation. But when the same Government themselves shall make laws to make the scenario – 77.25% or 0%, the Government is either spreading tax-terrorism or is indirectly encouraging corruption because the taxpayer is left with no other option to save his hard earned money and more importantly to buy peace of mind but to succumb to the wishes of a Babu.

There are series of such poor decisions lately by the Government like 100% penalty for transactions in cash for more than Rs. 2,00,000/- , taxing the profits of corporate thrice leading to effective tax rate of 50% on profits of Companies, poor implementation of GST etc which has lead to decrease in velocity of money and liquidity crisis and ultimately slow down of economy.
No doubt, there are natural factors in addition to the above, which are attributable to economic slow down.

It is true that the businesses have not slow down but the business model have changed. The valuation of Airbnb which does not own any properties is much more than Hilton or Marriot. The Valuation of Uber or Ola which does not own any taxi is much more than any Company in the world owning fleet of taxis or self drive cars.

We have moved from
“We sell Cars” to “We transport”.
“We run Private Schools” to “We educate”
“We trade” to “We make markets”

and thus every Indian businessman has to accept this change and bring an innovation in its products, process or Services. The present Government is doing an excellent work in encouraging innovation through its flagship programme “Startup India”. India with its 22k Startups is heading towards becoming one the largest Startup ecosystem in the World and Government has supported these Startups right from the launch of its Scheme.

The popularity of our PM is unmatchable. The present Government has got the greatest mandate ever in history of India and hence it is expected from the Government to grace its mistakes, be open to public discussion, take external advisory from Research Institutions or opposition leaders, where needed and take corrective actions for decisions which has gone miserably wrong.

PS : Become part of the movement to send a message to the Law makers about the ill-effects of Section 115BBE by signing this petition on change.org at http://chng.it/nNkxbhcK. Also you may share this article through Facebook/ Whatsapp or Retweet from my Twitter handle camehul87 to spread awareness.

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