There is smarter lot of taxpayers who are nowadays trying to beat the May 31 deadline? The lot that’s partly fuelling an unusual spurt in cash deals in recent weeks. Deals to organise a mountain of cash to pay a builder for a home or to keep off a sticky-fingered bureaucrat. For some, these are the last and the easiest routes to transform currency notes stashed inside cupboards into legitimate bank deposits; while for many others, it’s a way to gift a friend without any tax hassles.
These Smart Taxpayers have been quick to spot a loophole in the law that will exist for just another fortnight. And, are making the most of it. The deals, simple and quick, have a common link: all such transactions will take them to Zaveri Bazar, the congested gold market of uptown Mumbai. To make the transaction foolproof, the parties will have to either buy or sell gold bars.
A man who has to generate, say, Rs 50 lakh of cash will have to find someone who has it, and is looking for a way to convert the black money into white. And this is what they will do:
Step 1. The man who needs the cash will buy 10 gold bars of Rs 5 lakh each. A perfectly official transaction. Here, he will pay in cheque to the jeweller and collect the bullion.
Step 2. He then ‘gifts’ the gold to the other man, who gives him the cash equivalent. Thus, the person who was looking for cash gets it.
Step 3. The person who receives the gold sells it in the market to recover his money. Again, an official transaction and the cheque he receives from the jeweller is deposited in his bank.
The three-step transaction helps one man to convert his undisclosed money into white while the other generates Rs 50 lakh without withdrawing it from his bank account and arousing the teller’s suspicion. What makes it happen is gold.
Surge in cash holdings
“But from June 1, such deals can’t happen. The rules have been changed in the Budget, where any gift of bullion will be treated as an income in the hands of the receiver and attract the usual tax. Till recently, bullion was excluded from the list of movable assets like shares, debentures… In many cases, people are forced to do these transactions. What do you do if the builder asks 40% of the money in cash?,” said a Mumbai-based senior chartered accountant who has advised many to structure such deals.
Strangely, cars are still excluded from the list of movable assets whose transfers will trigger a tax claim. “While one can use this lacunae in the law to ‘gift’ motor cars, it can’t be a convenient option to convert black money into white and vice-versa. There’s registration cost and other transfer charges,” said a tax planner who confirmed several such cash deals happened in the last one month. That is where gold, which can be instantly sold, comes handy.
(Please note Post is not intended to encourage tax theft. We just tried to present the loophole in current tax law. )
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Page Contents
- 1. Subsequent to amendment in section 56 of the Income Tax Act, 1961, Purchase of Rights issues, preferential allotments by companies to you may land you in tax net
- 2. Amendments to Section 56(2) with respect to Deemed Gifts and transfer of movable & immovable property
- 3. Section 56 amended to cover property received without or inadequate consideration by closely held companies
- 4. Budget 2010-11: Taxation of certain transactions without consideration or for inadequate consideration
- 5. Finance Bill 2010: Deemed gifts under the Income Tax Act
- 6. Comprehensive Note on gifts, deemed gifts and deemed under-valuations incorporating proposals by the Finance Bill, 2010
- 7. Transfer of shares to Partnerships and Closely Held Companies to attract the provisions of section 56(2) in the hands of the recipient: Budget 2010
- 8. Summary of Valuation rules for Jewellery, Artistic Work, Shares and securities
