Unaccounted cash, particularly in property transactions, has long posed a challenge to India’s fiscal transparency and economic governance. Despite various provisions, successive governments have struggled to contain undervaluation of property, stamp duty evasion, and the circulation of black money
Once, there used to be a provision under Section 269U of the Income Tax Act, 1961 that gave the government the option to purchase property at 10 per cent above the sale consideration declared in the income tax return by the buyer. However, this provision was deleted from the Act with effect from 01.07.2002 because of practical difficulties faced by the government. First, the government required excessive funds to purchase properties that the Income Tax Department considered undervalued in the returns. Second, the provision often resulted in deliberate acquisitions of properties that ultimately caused losses, as the government could not even recover the purchase price during subsequent auctions.
At present, the only provision available to the Income Tax Department is to treat the difference between the purchase price and the circle rate as “Income from Undisclosed Sources.” However, this provision is itself problematic. In certain areas, such as New Friends Colony in New Delhi, the circle rate is higher than the actual market rate. This creates peculiar situations in property transactions, as stamp duty must be paid on a value greater than the actual purchase price. Conversely, in most cases, property transactions prominently involve unaccounted cash. The involvement of unaccounted cash in property transactions can and should be curtailed through a series of reforms. First, the rate of stamp duty on property transactions should be uniformly reduced to 5 per cent across the country, inclusive of municipal charges.
A 1 per cent concession should be provided if the property is purchased exclusively in the name of a woman, and the concession should be proportionately reduced if the property is purchased jointly by men and women. Second, a permanent Voluntary Disclosure Scheme should be introduced, under which individuals may declare unaccounted income, including cash, in their income tax returns voluntarily under the maximum tax slab.
This slab should be restored to 30 per cent, as originally recommended by the Raja Chelliah Committee, instead of the current effective rate of about 43 per cent (due to surcharges and cesses). If a property seller declares unaccounted cash in a particular year, the Income Tax Department would simultaneously obtain valuable information about the purchaser who may have provided such unaccounted cash.
Such a scheme should also include a provision for compulsory long-term investment of 20 per cent of the disclosed funds in bonds of public sector companies, with floating annual interest equivalent to that of RBI bonds (currently about 8 per cent per annum). For instance, the Indian Railway Catering and Tourism Corporation (IRCTC) could be entrusted with managing such funds, with its operations expanded to establish production units in every district. These units could produce baked products for use in the Mid-Day Meal Scheme and railway catering, thereby generating both economic and social benefits. Additionally, the dual provisions for calculating long-term capital gains on property — either 12.5 per cent on the total gain or 20 per cent on the reinvested balance up to ten crore rupees - should be replaced by a uniform 10 per cent long-term capital gains tax, similar to that applied to gains from shares. This change would incentivise taxpayers to conduct property transactions transparently, reducing the reliance on unaccounted cash. Furthermore, a special website should be developed by the Income Tax Department on which property sellers would be required to list complete details of properties intended for sale.
The required or negotiated sale price must be declared. Any prospective buyer willing to purchase the property above the declared price within a stipulated period (for example, 30 days) should have the right to do so by depositing 10 per cent as earnest money. If multiple bidders come forward, the highest bidder would gain the right to purchase, provided the balance payment is made within ten working days of finalisation. If the highest bidder fails to make the payment, the earnest money should be forfeited, and the next highest bidder should be given the opportunity. If no higher bidder emerges, the seller may proceed with the originally negotiated deal. This proposed website should be structured hierarchically — state-wise, district-wise, and area-wise — with wide publicity among property brokers. If implemented carefully, this provision would substantially reduce the role of unaccounted money in property transactions. It would also benefit genuine sellers by enabling them to obtain fair market value for their properties, instead of losing out to intermediaries and brokers who often capture a disproportionate share of profits.
The same portal should also include a section for properties auctioned by banks to recover loans, thus serving as a consolidated, transparent marketplace beneficial for both financial institutions and investors. Collectively, these measures would induce transparency in property transactions, significantly reduce the role of unaccounted cash, and simultaneously boost the housing sector. The result would be greater revenue generation for the government through property-related taxation. Finally, India must also study and adopt best practices from countries such as Sweden, which is known for its cashless economy and widespread use of credit cards. In India, credit card use remains limited, largely because traders often charge an additional 2 per cent fee when payments are made by card, particularly in businesses with low margins. This surcharge exists because banks currently levy about 2 per cent on card transactions. To resolve this, the government should cap bank charges on credit card payments at 0.5 per cent, with the Union government bearing this cost.
Such a measure would increase credit card usage significantly, benefiting banks through higher transaction volumes, while the government would gain increased revenue due to improved tax compliance. Another major source of unaccounted cash is the misuse of the Goods and Services Tax (GST) structure. Unused GST invoices are sometimes “sold” in exchange for cash, with buyers and sellers sharing the benefits of false input tax credit claims. This practice has contributed substantially to cash circulation even after demonetisation on November 8, 2016. To address this, input tax credit (ITC) should be allowed only for tradable commodities and not for goods used as expenses or for which depreciation is claimed. Other corrective steps should also be taken to ensure that India can progress towards a cashless economy, as envisioned by the Prime Minister at the time of demonetisation on November 8, 2016.
The writer is a RTI consultant
