How To Disincentivise The Cash Economy: Carrot After Stick

How to Disincentivise The  Cash Economy:  Carrot After Stick

The last 13 days have already seen Rs. 5.25 lakh crores of the cancelled money deposited in the banks. Most of it, is towards a perfectly legitimate note-swap.

But if black money is to become history, it will take more than demonetisation, and a stiffened tax on about 1% of the most obvious large deposits that beg decent explanation.

It must take the charm out of the phenomenon once and for all.

The only thing that illicit cash can be spent on without obstacle, is petty consumption. It might seem like a lot of things, but comes down to food, drink, restaurants, clothes, jewellery, weddings, holidays, interior décor, the purchase of dollars to spend abroad- that kind of thing.

This is, after all the residue, the part not socked away in gold or property, here or elsewhere, veiled sometimes in other people’s names or companies. It is not the portion sent off abroad via hawala, or retained there in the first place, through creative invoicing of exports.

Some of the rest of the cash is also here, hiding in plain sight, as lubricant that eases the off-the-books raw material inflow in business.  

Everybody productive is literally in on the act- doctors, lawyers, traders, consultants, service providers, politicians, agents. You name it.

But what always nags every hoarder, particularly after many erstwhile avenues of investment have disappeared, is that a lot of cash sitting around is not earning anything.

And this is the very point of convergence with the thinkers in the official economy.

They too miss the fact that ever expanding stores of money, sitting in hiding, was not doing anything for growth, or the national economy.

But how can we rub out the distinction between black and white money, once and for all?

Some suggestions are by way of drastically lowered rates of direct taxes, and expanded tax slabs. But this cannot address the fact that a bare 3% own PAN cards, and only 2% pay income tax.

Companies in the organised sector, except for the larger listed ones, prefer to work their books of accounts to show losses, and spirit away all the profits in cash. Others cheat on their indirect taxes as well, on excise readings, production off the books, clandestine sales in cash, and so on.

The advent of GST will do a wonder of ‘online good’ to the plethora of indirect taxes being evaded joyously. But tweaking income and corporate taxes, however generously, will not provide solutions to the hydra of corruption, counterfeiting of currency, and tax evasion.

And while the profusion of armchair economists can suggest a torrent of punitive measures to contain and apprehend the tax thieves, they forget that the number of people to implement such measures, are limited, and have no incentive to add hugely to their work loads.

So the incentive that will work must be given to all those people out there fond of their illicit tax free cash and evasive ways.

There is a great anomaly, an injustice even, in a system when 98% of the people pay no direct tax, by right. And even dodge as much of the indirect taxes they can, as well!

The Pune based think-tank  Arthakranti’s  suggestion of abolition of all direct taxes, to be replaced by a 2% universal bank transaction tax, will work, because it is so eminently reasonable.

The rich farmers should not mind this small imposition, and the urban successes certainly won’t. The middle classes, used to being taxed ruthlessly at source on their salaries, will be delighted. The poor will not be inconvenienced either, because the impositions on small value transactions will not pinch.

The demonetisation, also suggested by Arthakranti, did not exempt anybody. But the abolition of direct taxes in favour of the universal transaction tax will have people flocking to put their money in the bank!

They can buy all that they have been, legitimately, and in their own names. Their surpluses will earn interest and returns on investment. Corporation need not conceal profits.

Interest rates too are due to be slashed. Loans will be the cheapest they have ever been.

It will also come as no surprise at all to see a great inflow of money, concealed abroad, finding its way back to India; not clandestinely, via the stock market, but straight in through the banking channels.

Corruption, a function of human greed, may well not be eliminated.  But counterfeit currency will find it hard going in a largely banked economy.

For: ABP Live

(746 words)

November 21^st, 2016

Gautam Mukherjee