When the demonetisation of Rs1,000 and Rs 500 notes was announced by Prime Minister Narendra Modi on November 8, 2016, the expectation was that about Rs 350,000 – 400,000 lakh crore out of a total Rs 15,44,000 lakh crore (embedded in these notes) would not come to banks. This was taken to mean tremendous success of this policy decision. On the one hand this would tantamount to sternest punishment to hoarders of black money (via junking all of their illegal wealth – accumulated over the years – to a worthless piece of paper) and on the other this would give a bonanza to the Reserve Bank of India by way of extinguishing its liabilities to the extent of amount not returned. Eventually, the money will flow into the coffers of the Union Government – being the owner of the apex bank. Now, that almost all cash held in these currency notes has come to banks, critics have flayed the policy decision as a monumental failure. But it would be premature to jump the gun.
Simply because a hoarder has managed to deposit his black cash in a bank after the Indian Government’s demonetisation decision, it does not automatically become white. The depositor will be required to explain the source of his/her cash. Any amount that remains “unexplained” will be treated as black and dwelt with sternly as per provisions of the Income Tax Act.
There was a “loophole” in the extant provisions of the Act. This would have allowed hoarders to declare their black money as a “windfall” income in the current financial year (2016-17) and get away by paying the normal tax at the rate of 30%. A big rush to put undisclosed funds in bank accounts initially was, in fact, prompted by this. Finance Minister Arun Jaitley got an amendment passed to plug the loophole.
Under the amended Act, persons who opt for the Pradhan Mantri Garib Kalyan Yojana (PMGKY) will pay 50% plus another 25% of their undisclosed money. Their money will be blocked for four years and no interest will be paid to them. Those who do not join the PMGKY but declare their “undisclosed income” in their tax returns, will part with 85% of their black money. And, those who don’t declare their black money in their returns and are caught by the I-T Department during search and seizure, will have to shell out even more which could even exceed 100%.
BIG BOOST TO GOVT RESOURCES
Effectively, this will leave a mere 25% or 15% of the black money or nil in the 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 of crores.
According to reports, a mammoth Rs 730,000 lakh crore has been received in six million accounts; each account getting a deposit of Rs 200,000 or more (110,000 accounts received Rs 400,000 lakh crore; a still smaller number of 50,000 accounts got Rs 200,000 lakh crore). With this, the Government could even garner over Rs 500,000 lakh crore.
The money, according to sources, would be available for investment in India’s infrastructure – physical (rails, roads, ports, highways and irrigation) and social (schools, hospitals, colleges and skilling institutes) – as also for supporting welfare schemes for the majority of poor people. This will boost India’s growth, create millions of jobs and reduce poverty in the country.
Persons who were hitherto mostly transacting in cash and got away without paying any tax, will come under the I-T surveillance/radar. They will be forced to disclose their income (irrespective of whether they continue doing transactions in cash or switch to electronic/digital mode) and become regular taxpayers. 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 the increasing credit requirement of industry and trade. At present, there is a big void, especially in regard to the financing needs of small and medium enterprises and start-ups. Flush with funds in current and savings accounts (albeit at a low interest rate), banks will be able to fill this void.
MEASURES TO REIN IN CORRUPTION
As regards the generation of black money in future, the Modi Government is already taking a host of measures, viz its plan to introduce Goods and Services Tax in India, policy-driven decisions, streamlining official procedures and processes, eliminating bureaucratic red tape and focussing on e-governance. These measures will rein in corruption and the creation of black money in dealing with Government machinery.
In short, the demonetisation will help expand the size of the “legitimate” economy (by merging the “parallel” economy with it), bring about a sustained increase in tax buoyancy and an increase in credit availability, give a big boost to economic growth, generate employment opportunities and augment incomes across all sections of Indian society.
To get the intended results, it is imperative that the I-T Department acts with alacrity on marathon data on deposits juxtaposing this with I-T returns of depositors to zero in on “unexplained” cash and vigorously pursue the collection of tax. Till this is done, the depositers must not be allowed to withdraw/transfer money from their accounts.
The I-T Department should act in “unison” and in a “coordinated” manner with other government agencies, viz, the Enforcement Directorate, the Finance Intelligence Unit, the Central Bureau of Investigation and the Air Intelligence Unit, to ensure that the exercise gets successfully consummated within a reasonable timeframe. Any laxity in this regard could boomerang. It will not only prevent the fructification of the potential benefits of demonetisation but also give a handle to critics in debunking the policy decision of the Union Government.
In the middle of last year, commenting on the Income Declaration Scheme, Prime Minister Modi had alluded to “engaging 100,000 officers in the I-T Department,” 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 by deploying requisite manpower and using advanced tools of “analytics” to deliver on his promise.