When, demonetization [scrapping of 1000/500 notes] was announced by prime minister, Modi on November 8, 2016, the expectation was that about Rs 350,000 – 400,000 crores out of a total Rs 1544,000 crores [embedded in these notes] would not come to the banks. This was taken to mean tremendous success of this policy decision.
Apart from meting out sternest punishment to the hoarders of black money [all of their illegal wealth accumulated over the years would be reduced to a worthless piece of paper], this would give a bonanza to Reserve Bank of India [RBI] by way of extinguishment of its liabilities to the extent of amount not returned. Being owner of RBI, the money will eventually flow to coffers of the center.
Now, that almost all cash held in these high denomination currency notes has come to banks [though, a final word on this is yet to come from RBI as alluded to by governor, Dr Urjit Patel in his recent deposition before a parliamentary committee], the critics have flayed the policy decision as monumental failure.
Though, one would be happy to see complete annihilation of the black cash stashed by hoarders [as initially expected], just because this has not happened, it would be premature to jump the gun. There are a host of other benefits accruing from this decision.
At the outset, simply because a hoarder has managed to deposit his black cash in the bank, it does not automatically become white. The depositor will be required to explain the source of cash. Any amount that remains ‘unexplained’ will be treated as black and dwelt with sternly as per provisions of Income-Tax [I-T] Act.
There was a ‘loophole’ in extant provisions of the Act. This would have allowed hoarders to declare their black money as ‘windfall’ income in current year [2016-17] and get away by paying normal tax @30%. Needless to say, a big rush to put undisclosed funds in bank accounts initially was prompted by this. The finance minister, Arun Jaitely got an amendment passed to plug the loophole.
Under the amended Act, persons who opt for Pradhan Mantri Garib Kalyan Yojna [PMGKY] will pay 50% plus another 25% will be blocked for 4 years on which no interest would be payable. Those who do not join PMGKY, but declare ‘undisclosed income’ in their return, will part with 85%. And, those who don’t declare in the return and are caught by I-T during search and seizure, will have to shell out even more which could even exceed 100%.
Effectively, this would leave a mere 25%/15%/Nil in hands of the hoarder depending on the extent of his cooperation with authorities. Correspondingly, the government’s resources will be boosted by hundreds of thousands crores. According to KV Kamath, chairman, New Development Bank of BRICS, the tax bonanza could be a high of about Rs 250,000 crores.
According to reports, a mammoth Rs 730,000 crores have been received in 6 million accounts each account getting deposit of Rs 200,000 or more [110,000 accounts received Rs 400,000 crores; a still smaller number of 50,000 got Rs 200,000 crores]. With this, the government could even garner over Rs 500,000 crores.
The money would be immediately available for investment in infrastructure – physical [rails, roads, port, highways, irrigation etc] and social [schools, hospitals, colleges, skilling institutes etc] – as also for supporting welfare schemes for majority of poor. This will boost growth, create millions of jobs and reduce poverty.
Persons who in the past, were doing all transactions in cash and got away without paying any tax, will come under I-T surveillance/radar. They will be forced to disclose their income [irrespective of whether they continue transacting in cash or switch to electronic mode] and become regular tax payers. The government will get more tax revenue year-after-year.
Further, with more cash passing through the banking system, the latter will have sufficient capital to meet increasing credit requirement of industry and trade. At present, there is a big void especially in regard to financing the needs of small and medium enterprises [SMEs] and start-ups. Flush with funds in current and savings account [albeit at low interest rate], banks will be able to fill this void.
As regards generation of black money in future, Modi – dispensation is already taking a host of measures viz., GST [Goods and Services Tax], policy driven decisions, streamlining of procedures and processes, elimination of bureaucratic red tape, focus on e-governance etc. All of these will act as strong deterrent to corrupt practices in wheeling dealing with government machinery.
In short, the unprecedented step of demonetization has the potential to expand the size of ‘legitimate’ economy [by merging ‘parallel’ economy with it], bring about sustained increase in tax buoyancy, increase in credit availability, boost to economic growth, generation of employment opportunities and augmentation of incomes across all sections of the society.
However, to get the intended results, it is imperative that I-T department acts with alacrity on the marathon data [on deposits and returns filed with I-T] to zero-in on ‘unexplained’ cash and vigorously pursue collection of tax. Till this is done, the depositors must not be allowed to withdraw/transfer money from their accounts.
The department should act in ‘unison’ and ‘coordinated’ manner with other agencies viz. Enforcement Directorate [ED], Finance Intelligence Unit [FIU], Central Bureau of Investigation [CBI] and Air Intelligence Unit [AIU] to ensure that the exercise gets successfully consummated within a reasonable time frame. Any laxity in this regard will boomerang. It will not only prevent fructification of the potential benefits of demonetization but also give a handle to the critics in debunking the policy decision.
In the middle of last year, commenting on IDS [Income Declaration Scheme] – 2016, Modi had alluded to ‘engaging additional 100,000 officers in the I-T’ if need be to chase black money mongers and get them to pay taxes legitimately due to the exchequer. Now, is the time for him to act viz., deploy requisite manpower along with advanced tools of ‘analytics’ to get the desired results.