When the four-month window (June 1 to September 30) for the declaration of black money under the Income Declaration Scheme (IDS) was open (under it, a person could pay 45 per cent of disclosed amount (30 per cent tax plus 15 per cent penalty) and thus, convert black in to white), Prime Minister Narendra Modi had issued a veiled but stern warning to tax dodgers. He opined that persons who do not come clean now will be dealt with a heavy hand after September 30.
Based on information collected from various sources viz, banks, property registration offices, jewellers and other platforms, where big ticket transactions are done, the Finance Ministry had compiled a list of nine million persons, who spent up to one crore rupees in previous year, but had not filed their income tax return. The Income Tax department had also sent discreet e-mails to alert them that they could be potential targets for levy of heavy penalties, besides tax, if they don’t disclose. However, an overwhelming majority of them did not take the warning seriously. This is evidenced by the fact that under the IDS scheme, a meager 64,000 persons or 0.7 per cent of potential dodgers, declared their undisclosed income and property. Per se, the total amount disclosed ie Rs 65,250 crore may look impressive (this is double the amount Rs 33,000 crore disclosed under the Voluntary Disclosure Income Scheme (VDIS) brought in 1997) but is still a drop in the ocean. The quantum of black money in the economy is estimated to be in the range of a quarter to two-third of the gross domestic product (GDP), depending on the source. Taking GDP at Rs138,00,000 crore at the lower end, it works out to about Rs35,00,000 crore. At the higher end, this is Rs 92,00,000 crore. Against this, the disclosure under the IDS scheme was a trifle 1.86 per cent of the total stock at lower end and 0.7 per cent at the higher end. To initiate proceedings against such a humongous number – close to one crore tax dodgers – and get them pay tax (besides penalty) would have been an impossible task (recourse to search and seizures in the last two years have yielded only a few thousand crores). Modi’s announcement on November 8, that “the existing Rs500 and Rs1,000 denomination notes will no longer be legally valid from midnight of that day”, needs to be viewed in this backdrop.
The cash component of black money is about 40 per cent or Rs14,00,000 crore at lower end and Rs37,00,000 crore at the higher end. Further, nearly 86 per cent of the cash is held in the form of these high denomination notes. This translates to Rs12,00,000 crore and Rs32,00,000 crore respectively. With demonetisation, the Government has reduced all these cash into pieces of papers!
Persons holding cash have been given the option of depositing them into their bank account without any limit (exchange of Rs2,000 a day for new notes is any way not meant for hoarders of black money). But, any amount in excess of Rs250,000 will come under IT scrutiny and attract 200 per cent penalty (besides 30 per cent tax and 7.5 per cent surcharge) plus a jail term up to seven years. So, they will go for a lesser evil of destroying them. This action is a master-stroke that can curb black money menace. It extinguishes Rs12,00,000 crore and Rs32,00,000 crore worth of liability of the Reserve Bank of India (RBI). Put differently, it bolsters assets of the apex bank by that much who in turn can pump equivalent amount in the economy through banking channels. The banks will get enough capital to fully offset their non-performing assets. There will be unprecedented surge in credit to industries and businesses for increasing investment and propelling growth. Millions of youths will get jobs and income levels will rise, giving a big boost to aggregate demand. Higher growth (definitely in double digit) will yield more tax revenue for the Government which will be much better positioned to adequately fund all welfare schemes for the poor, besides investing in infrastructure viz, roads, highways, port, rails etc.
The country will also be saved from other pernicious ills that are germane to black money remaining in the hands of tax dodgers viz, high price of real estate/homes, medical facilities, education etc, in fact, any essential items (including pulses, fruits/vegetables) which can fall prey to hoarding and black marketing by them. The common man groaning under spiraling inflation will be a thing of past.
A collateral benefit will be smashing of counterfeit currency and associated funding of terrorist activities by our neighbour. Apart from preventing casualties, both civilian and military, this will help save thousands of crores of rupees that the Government currently spends on defence and maintaining peace on border as well as within. This money can be used for economic development. The decision will also give a big fillip to Modi’s efforts to rein in corruption. When the mountains of cash that bribe givers set aside for such acts has been reduced to ashes, corruption will automatically get eliminated.
Specifically, the Goods and Services Tax (GST), slated for introduction from April 1, 2017, will bring all transactions on taxman’s radar even as anyone keen not to report will be left out of GST chain and won’t get credit for taxes paid on his purchases. So, he will be forced to do proper billing for every sale. Besides, he/she can always be traced by looking at e-register of person making supplies to him/her.
The demonetisation drive is a master-stroke which will bring economic empowerment to the people in the true sense and lay the foundation for double-digit growth to be sustained over a long-period of time.
(The writer is a public policy analyst)