demonetization of property and gold

There is still talk of demonetization; some in favor and some not. Cracking down on corruption and black money is a good idea. Whether demonetization will bring about the required change remains to be seen. That said, Indians no longer hoard most of their cash in the form of cash; both storage and security issues have caused them towards property and gold; of course, they were always the conduit. Yet, the proportion representing hard cash has significantly reduced, and that representing property and gold has significantly increased.  

So property and gold it is for the Indians. How to deal with that pretax cash diverted to land, building, and gold? Asking them to use aftertax cash rather than pretax is not useful; remember, it has not worked. Will asking them not to pay tax on capital gains work? I don't think it is a good idea. 

Why should people who deal in property and gold be treated differently from to say, a business owner? It would be like if you start a business, profits will be taxed. If you buy and sell either property or gold, profits will be exempt. Little funny, wouldn't it be? 

Investing is a serious business, whether in equities, debt, property or precious metals. The intention is to make profits out of the transaction; so that should make it a business. And it is a business, not any different, even for those who transact occasionally. When a home buyer for primary residence sells it after a decade or so, profits made are investment profits, albeit long term. 

Lack of regulation and bad intent of people have been the cause of this massive hoarding of black money in the form of property and gold. Crackdown on this is really important.

I haven't got nice things to say about gold; but have four suggestions, though. One of the best ways to stop corruption in gold is to tax it heavily; make it more expensive. It would also be additional income for the government. If people still want to buy gold, so be it. Second, every transaction on gold should be based on the PAN of the buyer; No PAN, no transaction. Third, increase the tax rate on capital gains. The idea is to pay heavy penalty by those who buy and sell gold. Fourth, all transactions should take place through banks such as cheque, net banking, and transfers. If someone does not have a bank account and wants to buy gold, that person got the priorities wrong. Needless to say, the authorities should keep an eye on the income of the buyer and buying pattern. 

It is a little different for properties. Investing in properties is a good deal. But in India, rents are not aligned to the market prices of properties. Due to this, the investor is brought to hope for increase in prices to offer reasonable returns. Excessive dependency on prices has made property transactions similar to that of a not-cash-generating asset. The investor will make money only when a greater fool is found. It is pathetic as investors are forced to overpay; blame it on the regulation. As prices seem high enough, buyers consider that using pretax cash is more profitable. It is a vicious cycle: black money channeled to buy property; consideration upon sale received in cash is again used to buy property; and so on.

Bringing tighter regulation is the key to deal with corruption in land and buildings. The single most important thing is to have a mechanism to track every transaction online. Make PAN compulsory for the transaction; I am not sure if it is there in rural areas when small plots of land are bought and sold. Reduce the complexities involved in capital gains tax on property. Bring rentals in line with market prices. For that to happen, value of the transaction should be included for registration purposes. Stamp duty and rentals are then based upon the market value. Again, make transactions through banking channels compulsory; cash cannot be used. Profits made on sale of land and buildings are investment gains; these should be taxed appropriately.

It would be an interesting idea if long term is when property is held for more than 5 years. And how about having a progressive system - short term<= 5 years; 5 to 10 years; 10 to 20 years, and more than 20 years - for capital gains tax?

Demonetization of property and gold, how's that!