CASHING IN

With gifting gold coming under tax net from June 1, evaders swap yellow metal for cash

WHENEVER a client walks into his office these days, Dalipbhai plays a little guessing game. Is the man the quintessential, unsuspecting taxpayer anxious to file his return? Or, does he belong to the smarter lot 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.

    Helped by seasoned chartered accountants like Dalipbhai, they 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.
THE GOLD ROUTE
A MAN WHO NEEDS, SAY, Rs 50 LAKH OF CASH WILL ASK HIS CA TO SPOT SOMEONE WHO HAS THE AMOUNT. AND WHAT FOLLOWS IS THIS: 1
The man who needs the cash will buy 10 gold bars of Rs 5 lakh each. He pays by cheque to the jeweller and collects the bullion 2 He then 'gifts' the gold to the other man and the latter gives him the equivalent cash 3
The person who receives the gold sells it in the market and recovers his money. Again, an official transaction and the cheque he receives from the jeweller is deposited in his account Data point to 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.
    Interestingly, recent data released by the Reserve Bank of India show an unseasonal surge in cash holdings in the economy and large withdrawl in demand deposits from banks in April — a trend typically seen during festivals and before elections. According to published data, more than Rs 57,000 crore was withdrawn from banks, including co-operative banks, between early April and April 23 this year. "There weren't too many public issues, particularly big ones, which cause such fund movements. The withdrawal during the same period in 2009 was only Rs 21,000 crore," said a banker.
    Cash holdings with individuals and businesses rose almost by Rs 32,000 crore last month — about Rs 6,000 crore higher than the year-ago number. The currencydeposit ratio has also inched up, from 0.159 in March 31 to 0.165 in April 23. While it will be far fetched to explain the composite data by the various 'cash deals', such transactions are likely to have influenced the recent money movements.