Friday, August 14, 2020
Home Opinions 3 lakh cap on cash transactions – How effective will it be?

3 lakh cap on cash transactions – How effective will it be?

In a previous article, I had tried to reason that withdrawal tax will have limited effect on back money as it tries to stem the source and does not affect the downstream flow. In the annual budget however finance Minister Arun Jaitley has proposed to ban all cash transactions above Rs. 3 lakh instead of taking the withdrawal tax route. In principle, GOI is trying to reduce black money by attacking the utility of money.

The argument seems to be that if cash cannot be utilized, there is less incentive to accept cash and so an overall reduction in the cash economy. Here we are trying to reduce the seller’s motivation to accept cash. So let us now try to look at transactions from the seller’s perspective and analyze the effect of a cash limit on undisclosed transactions in the cash chain.

Since the restriction is based on size of transaction, here is a representative cash chain based on transaction size from the seller’s perspective:

Cash chain
Cash squeeze and cash transactions

- Advertisement -

Basically independent of the size of transaction, a cash chain terminates at the bank. So, only the last transaction preceding the bank deposit is of interest here. This transaction cannot be more than the proposed 3 lakh limit. As long as the last transaction is less than the upper limit, a cash chain will exist.

In short, as long as someone in the chain is capable of breaking the cash received into smaller components, the outflow for cash will be available and as long as there is an outflow, black money will exist.

It is not as if this move will be completely ineffective. Big cash purchases are mostly in the luxury goods, Jewellery and Real Estate segments. Car manufacturers, luxury goods manufacturers will not be able to split their invoices into smaller amounts thus plugging some holes. Gold can be bought in small quantities, but then it will be a dead investment as it will be tough to sell it off again in small quantities.

However, small ticket purchases which cover most of our day to day needs are not covered and they will continue to exist. Professionals who have a dual source of income – white and black (corrupt officials, merchants and service providers who accept both digital and cash etc.) can utilize the cash component for day to day needs and save the white component for posterity. Real Estate also remains a dark spot as builders will be able to utilise cash by paying contractors as they have done after Nov 8th.

Principally this move is good as it reduces the power of cash. This is aimed at downstream transactions and not just the mouth of the cash chain. However, this will plug only a part of the high ticket transactions while leaving the smaller ones untouched thus not really promoting a cashless economy. More steps will have to be taken to further reduce the buying power of cash so that large amounts of accumulated cash cannot be easily utilized.

To borrow a metaphor from my previous post – if we imagine the cash chain to be a long pipe with numerous leakages, this restriction will plug a few leakages but as long as water can circulate within the pipe and flow out from other nodes, the black economy remains alive and kicking.

  Support Us  

Whether NDTV or 'The Wire', they never have to worry about funds. In name of saving democracy, they get money from various sources. We need your support to fight them. Please contribute whatever you can afford

Related Articles

Trending now

Former SP leader Shahzeb Rizvi announces bounty of Rs 51 lakh on Karnataka Congress MLA’s nephew Naveen’s head for ‘blasphemous’ Facebook post

Shahzeb Rizvi said that whoever beheads Naveen for insulting the Prophet and brings his head will be given a bounty of Rs 51 lakh

Chinese media publishes propaganda of Pakistan’s Ambassador to China but refuses to carry India’s rebuttal: Here are the full details

A day after first anniversary of abrogation of Article 370, Chinese state media runs Pakistani propaganda

Congress link emerges in Bengaluru riots, husband of party’s corporator named as an accused in FIR

Kaleem Pasha - one of the masterminds of Bengalururiots, is the husband of Congress corporator from Nagavara Irshad Begum

‘Temples are spreading COVID-19’: 5 reasons why that is untrue and mere propaganda, driven by Leftists and Islamists

Left-liberals and Islamists have started to trend "#TirupatiVirus" on Twitter, claiming that 75% of India's COVID-19 cases are linked to temples.

Dravidian sabotage in education: Behind the veils of the Dravidian Delusion

Tamils in Tamil Nadu have had the benefits of national integration, wider exposure to language among others, denied to them by the Dravidian agitation.

PM Narendra Modi launches Transparent Taxation platform, Taxpayer’s Charter to honour the honest taxpayers

PM Modi launches new transparent taxation platform including Faceless assessments, Faceless appeals, and Taxpayer's charter

Recently Popular

Bengaluru: Amidst chants of ‘Allah Hu Akbar’ and ‘Nara e Taqbeer’, Muslim mob burns down police station, Dalit Congress MLA’s residence over Facebook post...

Angered over Dalit Congress MLA's nephew's alleged Facebook post on Prophet Mohammad, rioting Muslim mob went on a rampage in Bengaluru

Alia Bhatt starrer Mahesh Bhatt’s Sadak 2 trailer gets over 1.3 million ‘dislikes’ on YouTube within hours of premiere

Within hours of its premiere on YouTube, the Sadak 2 trailer got over 1.3 million dislikes, making it one of the most disliked tailer on the video streaming site.

Pakistan: Maulvi rapes child reading Quran in mosque in Sindh province, caught on CCTV

Muslim Cleric in Sindh province in Pakistan on the run after video of hem raping a child inside a mosque emerges, case registered

Bengaluru Riots: SDPI’s Muzammil Pasha arrested for organising, instigating violence, two other SDPI members absconding

The SDPI local leader Muzammil Pasha had visited the police station along with the mob to register a complaint against a person named Naveen over the alleged derogatory Facebook post.

Linkedin employee Sourav Paul vows to murder Brahmins, claims it is easier to kill instead of opposing them

LinkedIn Employee Sourav Paul was unapologetic about his vitriol and abused a person when his hatred towards Rama was pointed out.

Maharashtra CM’s son involved in Sushant Singh Rajput death case, says Bihar govt’s lawyer: Here are the full details

SC heard Rhea Chakraborty’s plea for the second time in connection with Sushant Singh Rajput death case today

Former SP leader Shahzeb Rizvi announces bounty of Rs 51 lakh on Karnataka Congress MLA’s nephew Naveen’s head for ‘blasphemous’ Facebook post

Shahzeb Rizvi said that whoever beheads Naveen for insulting the Prophet and brings his head will be given a bounty of Rs 51 lakh

Aircraft Accident Investigation Bureau appoints investigation team to find out causes of the Air India Express flight crash at Kozhikode airport

Capt. S S Chahar, former designated examiner of Boeing 737 NG, has been appointed as Investigator-In-Charge for Kozhikode crash probe

Bengaluru riots: Muslim mob wanted to kill Naveen for his ‘blasphemous’ post, torched down police station as cops prevented it

The Bengaluru riots were triggered by a Facebook post by Congress MLA Akhanda Srinivas Murthy's nephew Naveen

BMC removes illegal loudspeaker at Mankhurd for which Karishma Bhosale was heckled by Muslims, was sent notice by Mumbai police

Mumbai police had sent notice to Karishma Bhosale calling her request to lower volume of Mosque's loudspeaker "inappropriate"

From cheap goods to telecom: How China’s industrial hegemony and guerilla marketing tactics can hurt India

Be it the battlefield or business environment, Chinese have always tried to strain India's economy in all possible aspects.

Mumbai Police records statement of journalist Faye D’Souza’s husband in the ‘fake views’ scam involving singer Badshah

Rapper Badshah had confessed that he had paid Qyukl, where Sagar Gokhale is director and COO, for fake views of his YouTube video

ED questions Rhea Chakraborty over alleged mismatch in income and expenses, asks to submit financial records: Read details

Rhea and her brother are directors in at least two firms, Front India For World Foundation and Vividrage Rhealityx Private Limited, set up by Rajput.

Fact-check: Did water enter Delhi Transport Corporation bus when incessant rains flooded the national capital

The video which social media users claimed to be of Delhi is from Jaipur which was uploaded on YouTube on August 11, 2020

Chinese media publishes propaganda of Pakistan’s Ambassador to China but refuses to carry India’s rebuttal: Here are the full details

A day after first anniversary of abrogation of Article 370, Chinese state media runs Pakistani propaganda

Tricolour is slowly replacing the black flag in Chhattisgarh’s worst Naxal-hit regions as villagers embrace peace and development: Report

Many schools in the Bastar district, which is considered a core area of Naxal activity, have started initiating flag hoisting ceremony on occasions like Independence Day and Republic day or any other national festival, in which the villagers participate extensively, says the report.

Connect with us

239,751FansLike
429,178FollowersFollow
299,000SubscribersSubscribe