Say NO to BLACK!!
In most aspects of life, black is considered a beauty and is welcome - karuvizhi (black eyes), kaarkundhal (black hair), kaarmegam (dark clouds that brings rain), karungal (black stone that keeps insides of temples cool) and the darkness of outer space! However, when it comes to financial matters, regardless of its short-burst attractiveness, black only gives a headache!!
The real estate case of black money..
Most common people engage in black transaction only in real estate deals either because of a desire to evade tax or by simply following a (tax evasive) real estate system in the country where black money is demanded (during a buy) and/or pushed (during a sell). Lets take an example to see how involving black money as part of a transaction is harmful to one's financial well-being.
An investor buys a plot of land in 2004 and sells it in 2014. The middle column - "buy(b), sell(b)" represents the case where by the investor buys in black and sells in black (all-black deal). The right most column "buy(w), sell(w)" represents the case where by the investor buys in white & sells in white (all-white). In 2004, a Rs.9Lac asset is bought & registered at Rs.3Lacs, paying Rs.6L in black. And in 2014 it is sold at Rs.45Lacs - in the all-black deal investor receives Rs.45L, but registers the sale at Rs.30L receiving Rs.15L in black and in the all-white deal he receives & registers the sale at the actual price of Rs.45L.
buy(b),sell(b) buy(w),sell(w)
a. Buy Price(2004) 300000 900000
b. Sell Price (2014) 3000000 4500000
c. Indexed cost of Buy 633750 1901250
d. LTCG (b-c) 2366250 2598750
e. LTCG Tax (20.6% of d) 487448 535343
There are primarily 3 differences in this whole equation - the tax outgo @sell, stamp duty leviable @buy and the last (hidden) benefit of indexation on the buy price. First, when compared to the all-black deal, in the all-white deal, the long term tax incurred is an additional Rs.48k. But there are a number of provisions in the IT act to claim exemption of this tax.
Second, an additional Rs.1Lac stamp duty would be incurred in the all-white deal. However this cost could be deducted (with indexation) when calculating your long term capital gains, thereby greatly reducing your LTCG.
Lastly, notice that due to indexation benefit on the buy price (point c above), the black case indexes your buy price to only Rs.6.3L (when you actually had paid Rs.9L, 10 years ago). While in the white case, your buy price is indexed to Rs.19L (3x that of the black case).
Depending on the ratio of black:white, the actual difference in cost incurred and amount of black money left could vary. If you explore the other two combos - "buy(w),sell(b)" would lower your tax burden by 66% yet leave you with Rs.15Lacs in black money to handle. And the "buy(b),sell(w)" would only lead you to pay 50% more in long term capital gain taxes.
So who benefits from black?
Looking at all the four combos above, it is evident that the only party that stands to benefit in all transactions involving black money is the one from whom our investor bought the asset in 2004. All the other three parties (investor, state revenue office & central IT-department) all stand to lose one way or the other. So, it is a myth that black money is good for you. In summary, while black appears to help evade tax in the immediate term, in the long run, it only makes you pay more tax and additionally burdens you with handling the black component. So, be prudent and say no to black money. This is a small yet effective step by a common man in contributing to change the system!
The real estate case of black money..
Most common people engage in black transaction only in real estate deals either because of a desire to evade tax or by simply following a (tax evasive) real estate system in the country where black money is demanded (during a buy) and/or pushed (during a sell). Lets take an example to see how involving black money as part of a transaction is harmful to one's financial well-being.
An investor buys a plot of land in 2004 and sells it in 2014. The middle column - "buy(b), sell(b)" represents the case where by the investor buys in black and sells in black (all-black deal). The right most column "buy(w), sell(w)" represents the case where by the investor buys in white & sells in white (all-white). In 2004, a Rs.9Lac asset is bought & registered at Rs.3Lacs, paying Rs.6L in black. And in 2014 it is sold at Rs.45Lacs - in the all-black deal investor receives Rs.45L, but registers the sale at Rs.30L receiving Rs.15L in black and in the all-white deal he receives & registers the sale at the actual price of Rs.45L.
buy(b),sell(b) buy(w),sell(w)
a. Buy Price(2004) 300000 900000
b. Sell Price (2014) 3000000 4500000
c. Indexed cost of Buy 633750 1901250
d. LTCG (b-c) 2366250 2598750
e. LTCG Tax (20.6% of d) 487448 535343
There are primarily 3 differences in this whole equation - the tax outgo @sell, stamp duty leviable @buy and the last (hidden) benefit of indexation on the buy price. First, when compared to the all-black deal, in the all-white deal, the long term tax incurred is an additional Rs.48k. But there are a number of provisions in the IT act to claim exemption of this tax.
Second, an additional Rs.1Lac stamp duty would be incurred in the all-white deal. However this cost could be deducted (with indexation) when calculating your long term capital gains, thereby greatly reducing your LTCG.
Lastly, notice that due to indexation benefit on the buy price (point c above), the black case indexes your buy price to only Rs.6.3L (when you actually had paid Rs.9L, 10 years ago). While in the white case, your buy price is indexed to Rs.19L (3x that of the black case).
Depending on the ratio of black:white, the actual difference in cost incurred and amount of black money left could vary. If you explore the other two combos - "buy(w),sell(b)" would lower your tax burden by 66% yet leave you with Rs.15Lacs in black money to handle. And the "buy(b),sell(w)" would only lead you to pay 50% more in long term capital gain taxes.
So who benefits from black?
Looking at all the four combos above, it is evident that the only party that stands to benefit in all transactions involving black money is the one from whom our investor bought the asset in 2004. All the other three parties (investor, state revenue office & central IT-department) all stand to lose one way or the other. So, it is a myth that black money is good for you. In summary, while black appears to help evade tax in the immediate term, in the long run, it only makes you pay more tax and additionally burdens you with handling the black component. So, be prudent and say no to black money. This is a small yet effective step by a common man in contributing to change the system!
Comments
Post a Comment