Cash in Hand Is Worth More Than Card In Bush

a ha. Ketharaman. The answer to your conundrum is in the P&L management of a small business and the countries tax laws. Not payment technology. I am afraid you will not find any proprietors helping you with this research as that could end up being very expensive. The card interchange fee is low single digits and is primarily subsidised by cash payers. Except where there is a fee for card payment. Card payments a secure, traceable and can even manage your inventory. Corporation tax in the UK is 20% on profits. Cash is difficult to trace. Can you prove you took that cab ride to the Ivory Tower. The answer is probably no. Nor can the tax man.

@JohnQ:

TY for your comment. In the interest of brevity, in my post I'd deliberately skirted the inevitable insinuation that cash leads to tax evasion. But, now that you've raised it: 

• Cash and tax precede card and electronic payments by several centuries. So, cash does not automatically imply tax evasion.
• Proceeds of big time crime - e.g. insider trading - typically flow via wire transfers to offshore banking venues. Needless to say, no taxes are paid on them. So, electronic payment does not automatically imply tax compliance.
• There are zillions of businesses where the sale is recorded - and tax paid - although the payment is received largely in cash e.g. QSRs. Likewise the same cab industry where drivers shirk cards: The ride can be booked by mobile app, the passenger gets a print or electronic receipt at the end of the trip. And, to answer your question, yes, I can absolutely prove that I took any of these rides because I have the receipts. And since I submit these receipts along with my tax returns in order to claim deductions for these expenses, the tax department can also prove that these rides were taken and that the monies changed hands. 

Tax compliance or evasion depends more on whether the transaction was recorded or unrecorded, rather than the mode of payment.

Bless you Sir,

You say; “Cash and tax precede card and electronic payments by several centuries. So, cash does not automatically imply tax evasion”. But it has been a problem ever since.

1. This is an academic study on US perspective: They reckon its worth $345B
2. The next clip is a UK HMRC report that suggests that btax evasion due to cash payments is over £2B in the UK. Being the tax collector they will probably not over estimate it.
3. The Final clip is a nice stroy on how The Israeli Tax Authority is using innovation to battle cash tax evasion in taxi.

My clue to you that there was more going on is when your taxi took you to the petrol station and gave you a fuel reciept instead of a taxi reciept :-).

1. CASH BUSINESSES AND TAX EVASION

Susan Cleary Morse, Stewart Karlinsky, &

Joseph Bankman

According to government reports, most individuals with business income

fail to pay all their taxes, although some appear to cheat more than others. 1 Underpayment

of tax on business income is commonly attributed to the receipt of

cash. 2 The owner of a clothing store, for example, might sell a dress for cash

and not report the cash. Underpayment of tax by individuals on business income

contributes significantly to the federal tax gaIT-the difference between

what taxpayers owe on legal source income and what they pay. 3

The government estimates that the annual tax gap equals $345 billion.4

Susan Cleary Morse is a Teaching Fellow at Santa Clara University School of

Law. Stewart Karlinsky is Professor Emeritus at San Jose State University. Joseph Bankman

is the Ralph M. Parsons Professor of Law and Business at Stanford Law School.

1. See U.S. Gov'T ACCOUNTABILITY OFFICE, A STRATEGY FOR REDUCING THE TAX

GAP SHOULD INCLUDE OPTIONS FOR ADDRESSING SOLE PROPRIETOR NONCOMPLIANCE 3

(2007) [hereinafter GAO SOLE PROPRIETOR REPORT] (noting that "at least 6 1% " of Schedule

C filers underreported net income in 200 1 but that results were "skewed" in that the sole

proprietor taxpayers whose underpayment amounts put them in the top ten percent accounted

for sixty-one percent of understated taxes).

2. See Joseph Bankman, Eight Truths About Collecting Taxes From the Cash Economy,

TAX NOTES, Oct. 29, 2007, at 506, 506-07 [hereinafter Cash Economy] (connecting

sole proprietor government data and the cash business sector).

3. See Eric Toder, What Is the Tax Gap?, TAX NOTES, Oct. 22, 2007, at 1, 2 (noting

that the tax gap measurement excludes noncompliance stemming from failure to report taxable

income generated by illegal activities).

4. Treasury and the I.R.S. estimate the gross federal tax gap for 200 1 at $345 billion;

after enforcement and collection efforts and late payments, the net federal tax gap estimate

for 2001 is $290 billion. See INTERNAL REVENUE SERVICE AND U.S. DEP'T OF THE TREASURY,

REDUCING THE TAX GAP: A REPORT ON IMPROVING VOLUNTARY COMPLIANCE I (2007) [hereinafter

2007 TAX GAP REpORT] (reporting gross and net tax gap numbers); see also Toder,

supra note 3, at 5 (discussing National Research Program ("NRP") and I.R.S. estimation methodology).

How much tax is lost because of undeclared cash in hand payments?

The UK Chartered Institute of Taxation:

Estimates go from £2 billion a year upwards. The most recent estimate of the ‘tax gap’ (the difference between what HMRC collect and what they think should be collected) estimated that £4 billion a year is lost to tax evasion and a further £4 billion to the ‘hidden economy’. Within this, they estimate that £1.3 billion is lost to 'ghosts', those who have earnings from employment or self-employment and fail to declare any of this income, and £1.8 billion is lost to 'moonlighters', those who pay tax on their main job through PAYE but have a second job or additional income from self-employment. Of course, not all of these are tradesmen. A report from a parliamentary committee back in 2008 identified the three key ‘areas of risk’ in the hidden economy (ie where HMRC are most at risk of tax being lost) as self-employed people, such as builders and decorators, who often receive cash payments; individuals who trade on the internet; and buy-to-let landlords.

The Israeli Tax Authority is using innovation to battle cash tax evasion.

It turns out that taxi drivers have a very low tax compliance rate. That’s because they deal in cash. (When I was Maine’s state revenue commissioner we had compliance problems with fisherman and wood cutters who frequently also worked for cash.)

An article in Globes, Israel’s business website, says the Israeli Tax Authority has nabbed “dozens’ of taxi drivers who evaded taxes. The Israelis obtained a court order to get records from Get Taxi, a popular taxi app. After randomly selecting 50 drivers for tax audits, the government found most had not reported all their fares. Some paid fines while others may be facing criminal charges. With 3000 drivers signed up for Get Taxi in Israel, we suspect the other 2950 will soon be facing tax audits too.

Sorry but there's a fundamental misunderstanding here: My post mentions where I paid but doesn't say anything about receipts for this specific cab journey. The ways things happened, I paid by card at the petrol station but I got the taxi receipt from the cab driver. I submitted the taxi receipt as part of my tax return. Per records available with me and submitted to the tax department, the cabbie / cab company are on the hook for the income and couldn't have evaded tax in this specific case, with due respect to what happened in Israel, Maine or elsewhere.

While tax evasion might be a huge problem, cash can't be singled out for perpetrating it. And, as I mentioned above, the big ticket variety of it certainly happens via cashless modes of payments. 

Cash is not just for tax evasion - it is for convenience which also enables tax evasion. Why go through the pain of setting up a merchant account with an acquirer, getting your payments several days or weeks later, being charged MSCs and - most importantly - pay a 20% VAT on each of those transactions? Why bother if you can just accept cash and not do any of the above?

And by the way, that £2bn figure is probably for one average UK city like Newcastle - cash economy is far greater than most think!

The hidden CICO cost has become an even bigger barrier towards card acceptance since I wrote this post. Almost all cab companies have stopped accepting cards by now. Many of them have launched prepaid mobile wallets. While the companies are promoting mobile wallets heavily, their drivers are even more vehemently protesting their use by passengers. Apparently it now takes 15 days for cabbies to "cash out" payments made by mobile wallets.

I just got this tweet:

DamigosV  @s_ketharaman@aussiedhaliwal Incredibly in regional Australia, it may take 2 weeks for Cabcharge funds to reach the driver!

https://twitter.com/DamigosV/status/572840321664610304

Electronic payments (card/e-wallets etc) take more time to reach the beneficiary, which is a cause of concern to cab drivers (and other small businessmen). 

But why should this be an issue for the cab driver if he pays for his expenses by credit card? He will benefit from a delayed debit to his CASA as well.

This is a multi-faceted issue, where tax evasion and high fee concerns are definitely in play.

@AdityaG: Good question. I've a few likely answers: (1) I've used taxis in at least 10 countries. I haven't seen a single driver paying for fuel and other expenses by credit card (2) Even if they do, it's basic human nature to want to "eat your cake and have it too" (3) A cabbie once told me he broke off from Taxi Company X and Y because they delayed his payments well past their T+15 day commitment and signed up with Company C because this company was reputed to pay on its committed T+7th day (4) Problem with deferred payment is not technology or the deferred period per SLA. It's that the payee has already rendered a service and is helpless in front of the payer who suddenly achieves supreme power to keep delaying payments on a whim. Apparently, some payers even demand a bribe to release payments.