Black Money and Demonetization, Part 2: What’s Already Done and The Way Forward

This article is second in the 2 part series on Black Money & Demonetization. Strongly suggest you to read the first part, here:

Black Money & Demonetization, Part 1: All that you want to know about Black Economy

What’s Already Done

The Government has shown all intent to curb this menace of black money and it shows in the various steps it has taken in past 3 years.  It has amended the Real Estate Regulator Bill & Benami Property Bill. The real estate bill vests authority on the real estate regulator to govern both residential and commercial real estate transactions. This Act obliges the developer to park 70% of the project funds in a dedicated bank account. This will create a audit trail and hence minimize chances of accepting Black money. By amending the Benami Transactions Act, the govt has increased the punishment up to seven years’ imprisonment and fine for those indulging in such transactions, whereas the earlier law provided for up to three years of imprisonment or fine or both. Properties held Benami are also made liable for confiscation by government without compensation.

Global Agreements have been forged to check the stashing of Black Money in tax havens. In Nov 2016, Joint declaration for implementation of Automatic Exchange of Information (AEOI) between India and Switzerland was signed. As a result, it will now be possible for India to receive from September, 2019 onwards, the financial information of accounts held by Indian residents in Switzerland for 2018 and subsequent years, on an automatic basis. With the formation of SIT to bring back black money from abroad, Government has implemented a long standing directive of the Supreme Court. Talks are also on to obtain information of the already existing accounts.  In July, 2015, U.S. and India signed an agreement to implement the Foreign Account Tax Compliance Act (FATCA). The Indian agreement promotes mutual information sharing, meaning the U.S. will also share financial information on Indian residents who have investments in the U.S. with Indian Authorities.

By its Financial inclusion scheme Pradhan Mantri Jan Dhan Yojana, 28.56 crore new bank accounts have been opened so far. By linking the Direct Benefit Transfer Scheme with Jan Dhan, Over Rs 36,000 crore of the government exchequer were saved in last two years for providing various payments and wages directly to the bank accounts of the beneficiaries.  The big ticket reform, however, is the passing of GST Bill. The unified tax regime greatly simplifies the taxation policies and harmonizes the market. The real estate and Jewellery industry, along with other sectors,  are expected to see expansion of the tax payers base.

Other Reforms

  1. To push digitization of the economy, A Unified payment Interface, and the BHIM app has been introduced. The government has also introduced two schemes to promote BHIM App – referral bonus for the users and cash back for the traders.
  1. The maximum amount of cash donation for a political party has been capped at  Rs. 2,000 from any one source. Political parties will be entitled to receive donations by cheque or digital mode from donors.
  2. Under the corporate tax, in order to make MSME companies more viable and tax compliant, there is a proposal to reduce tax for small companies with a turnover of up to Rs 50 crore to 25%. About 67 lakh companies fall in this category. 96 % of companies to get this benefit.
  3. The Income Tax Act is slated to be amended  to ensure that no transaction above Rs 3 lakh is permitted in cash.
  4. The limit of cash donation by charitable trusts is reduced to Rs 2,000 from Rs 10,000.
  1. A proposal to mandate all Government receipts through digital means, beyond a prescribed limit, is under consideration.
  2. Simple one-page return form for people with an annual income of Rs. 5 lakh other than business income has been introduced.
  3. Existing rate of tax for individuals between Rs.  2.5- Rs 5 lakh is reduced to 5% from 10%.

Effects Of Demonetization

  • After Demonetization, Bhim app has been downloaded by over 10 million users. Daily transactions through e-wallet services has shot up from 17 lakh in October  to 63 lakh in December, a rise of over  300 %.
  • Transactions through RuPay Cards (e-commerce and point-of-sale) were up 316% at 16 lakh daily in December (3.85 lakh on November 8), while in terms of value the growth has been 503% at Rs 236 crore (Rs 39 crore).
  • Transactions using the newly introduced UPI have increased from Rs90 crore in November 2016 to Rs1,659 crore in January 2017. In March, UPI witnessed 6.2 million transactions worth Rs 2,390 crore.
  • Direct taxes have shown an increase of 12% in the period while indirect taxes have grown 25% over the same period a year ago. For December 2016 the growth rate in indirect tax has been 14.2% compared to December 2015.
  • For education on Digital Payments, free-to-air channel DigiShala which will be available on Doordarshan’s DTH platform and ‘CashlessIndia’ website has been launched.
  • On Jan2 , The State Bank of India (SBI), the country’s largest bank, slashed its loan rates sharply by 0.90 percentage points across all tenure loans in one of the steepest cuts since the 2008 global economic crisis. The rate for one-year loans now stands at 8% (against the previous 8.90%), 8.10% for two-year loans and 8.15% for three-year loans.

The way forward

As articulated earlier, curbing black money has no one stop solution. It has to be dealt in a holistic manner. Few strategies could be :

  • Rationalization of Tax rates.

Tax rates have lingered around 30 % for a long time now. Advantages of lowering it further could result in higher spending, the benefits of which can be studied. Simplifying tax rules can be a good way to attract tax payers. This will greatly reduce the cost of compliance in terms of time and effort. The Modi Govt has already tried to emphasize on e-filings, e-assessments and e-returns which are a welcome step.

  • Reforms in Sectors Vulnerable to Generation of Black Money.

This will be perhaps the key to plugging the conduits for storing the black money.

In Real estate, tax rates are considered to be high, which encourages the parties involved to withhold accurate reporting to the authorities.  A FICCI study suggests that to overcome this method of tax avoidance, taxes and charges at the time of registration can be split into two parts — a fixed component and a variable component. Irrespective of the reported value of the property a fixed component has to be paid to civic authorities, while the variable component will be dependent on the current market prices of the property. The market price of a property will be determined by an independent government approved agency.

In Jewellery and FMCG industry, the invoices issued to the retailers while the purchase happens must be compared with the sales reported by the retailers. The gap, if any, can be put to scrutiny. The Income Tax Act has made it mandatory to obtain PAN or Form-60 / Form-61 for purchase of bullion above Rs 5 lakh. The threshold can be reduced further. These industries also don’t maintain a book of accounts. A systematic change can be brought in with an appropriate regulation.  In large industries, the accounts are maintained through  specialized software. The officials must be either trained in understanding how it works or the government itself must introduce a software package.

In Mining and Allocation of Property Rights over Natural Resources, the Modi government has done a commendable job by e-auctioning of coal blocks.  According to the Centre, it earned over Rs 2 lakh cr from the auctions.

  • Reforms in Working Methodology

The I-T department must use information technology extensively in coming days. There is need to train the personnel in world’s best practices in identifying and taxing sources of black money. The government may encourage third-party reporting mechanism of the I-T Department which cover most high-value transactions. High value transactions are reported to I-T department by the property registrars, banks, RBI, mutual fund companies, etc., through third-party reports or annual information reports. There is a need to computerize this for swift delivery of duties.

  • Push for Digitization of Economy

The cash-ridden economy is always a catalyzer for generation of Black Economy. No one has understood this more than the Prime Minister himself. So there is little to suggest in this category. The demonetization has already started showing results in this direction. The details are furnished in the previous section.

Clearly, India is gaining momentum in its fight against the Black economy.  Along with all the tax reforms, the deterrence mechanisms, the prosecutions and any other schemes, what we need to do is create an awareness in the general public that Tax revenue ultimately helps in Nation Building. There is a need for the people to adopt themselves to the incoming technology and join hands with the government in this long drawn battle. And fortunately, the people have shown the appetite to digest and adapt to change.