When, the 4 months window [June 1- September 30, 2016] for declaring black money under income declaration scheme [IDS] was open [under it, a person could pay 45% of disclosed amount (30% tax plus 15% penalty) and thus convert black in to white], prime minister 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, 2016.
Based on information collected from various sources viz., banks, property registration offices, jewelers and other platforms where big ticket transactions are done, finance ministry had compiled a list of 9 million persons who spent up to Rs 1 crores in previous year but had not filed I-T return. The 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.
Yet, an overwhelming majority of them did not take the warning seriously. This is evidenced by the fact that under IDS, a meager 64000 persons or 0.7% of potential dodgers declared their undisclosed income and property. Per se, the total amount disclosed i.e. Rs 65,250 crores may look impressive [this is double the amount Rs 33,000 crores disclosed under 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 2/3rd of the GDP [gross domestic product]. Taking GDP at Rs 138,00,000 crores, at the lower end, it works out to about Rs 35,00,000 crores. At higher end, this is Rs 92,00,000 crores. Against this, disclosure under IDS is a trifle 1.86% of the total stock at the lower end and 0.7% at higher end.
To initiate proceedings against such a humongous number – close to 1 crore tax dodgers – and get them pay tax [besides penalty] would have been an impossible task [recourse to search and seizures in last two years have yielded only a few thousand crores]. Modi’s announcement on November 8, 2016 that ‘Rs 500/1000 denomination notes will no longer be legally valid from the mid-night of that day needs to be viewed in this backdrop.
The cash component of black money is about 40% or Rs 14,00,000 crores at lower end and Rs 37,00,000 crores at the higher end. Further, nearly 86% of cash is held in the form of these high denomination notes. This translates to Rs 12,00,000 crores/32,00,000 crores respectively. Vide demonetization, the government has reduced all of this mountain of cash to a piece of paper!
The persons holding cash have been given the option of depositing in their bank account without any limit [exchange of Rs 4000 a day for new notes is any way not meant for hoarders of black money]. But, any amount in excess of Rs 250,000 will come under I-T scrutiny and attract 200% penalty [besides 30% tax and 7.5% surcharge] plus jail term up to 7 years. So, they will inevitably go for a lesser evil i.e. to destroy/burn them.
This action by NDA – government has no parallel in the financial history of India. It is a master stroke that rids the economy from the menace of black money. It extinguishes Rs 12,00,000 crores/32,00,000 crores worth of liability of RBI. Put differently, it bolsters the assets of apex bank by that much who in turn, can pump equivalent amount back in the economy through banking channels. The banks will get enough capital to fully offset their NPAs [non-performing assets].
There will be unprecedented surge in credit to industries 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 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 all the 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 neighbor. Apart from preventing casualties [both civilian and military], this will help save thousands of crores government currently spends on defense and maintaining peace on border as well as within. The money can be used for economic development.
The decision will also give a big fillip to Modi’s efforts to rein in corruption. The bribe money given to seek favors from corrupt officials/politicians is invariably in cash [albeit] unaccounted. When, the mountain of cash that bribe givers set aside for such acts has been reduced to ashes, corruption will automatically get eliminated. As regards piling of cash afresh to fund bribe in future, the government has closed most of the loopholes in the system.
Specifically, the 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 present government has plugged yet another major loophole via switching over to direct benefit transfer [DBT] of subsidies and other financial benefits into account of beneficiaries under most of its welfare schemes. So, be it MGNREGA, mid-day meal, NRHM, Food Security Act etc all have stopped leaking thereby blocking flow of cash to corrupt bureaucrats/politicians.
130 crore people of India salute this great prime minister and his team for playing a master stroke which will bring economic empowerment to them in the true sense and lay the foundation for double digit growth sustained over a long-period of time.
Great article. Really informative. Country needs Scholars like you for taking on the rumor mongers.