Modi’s Existential challenge: The Demon In
Demonetisation
If demonetisation
is not followed up with additional new moves, black money generation is going
to come back redoubled.
Tinkering with the Income and Corporate Tax rates won’t
do. After all, direct taxes account for roughly a third of the taxes collected,
mostly from hapless middle class salary earners, plus the prominent listed
companies.
Only three individuals out of 1.3 billion have paid more
than Rs. 100 crores in income tax recently, and the tax-payer base accounts for
just 2% of the total population.
As long as 98% pay no direct taxes, and exempted
‘agricultural income’, runs into trillions, in just a few hands, the cash
economy cannot be vanquished.
The 98% must join the 2%, or clearly, the 2% must join
the 98%!
And yes, all those who have lost money in the laundering
of their cash, will be seeking to recoup their losses. Bribe rates demanded
will go up, doubling in many cases, as will all kinds of facilitation and
service fees.
And the ostensibly untraceable, mint-new Rs. 2,000 notes,
in their smaller, shocking pink glory, will prove much easier to stack.
Meanwhile, nearly
Rs 9 lakh crores of the demonetised currency notes have already been deposited,
in under 20 working days.
There is some consternation, as the tank fills up nearly
to the brim, that large tranches of laundered black money, is part of the haul.
How much of the value will finally be extinguished is a
point of conjecture, because even the part that has found refuge in mosques,
churches, gurdwaras, temples etc.; in gold, or US dollars, is coming in via their
trustees, the jewellers and currency cum hawala dealers.
This money has
also swelled Jan Dhan and lakhs of dormant accounts, sometimes, with the
collusion of bank officials, before moving around again, all for an alleged
facilitation fee of between 30-50%.
This, before it was known that the government proposes to
tax the unaccountable money at 50% per
the amendment to the Income Tax Act just passed.
The 50% looks so much more reasonable than the early
threats of 200% penalty on the top marginal tax rate, then doing the rounds, taking
the hit to about 90%.
Other objectives, that of disrupting the flow of
counterfeit currency, black money generation and use in the distribution of ‘tickets’
and election war chests, of moving towards a digital, cashless economy, have
gained traction, and indeed succeeded for the moment.
But, they all threaten to resume, with the ‘parallel
economy’ coming back with a vengeance, unless more is done.
The choices are fairly stark. Either bring in all the
rich farmers and various other questionably exempted entities and tax shelters,
such as wealthy political parties, Trusts, NGOs, religious institutions, and so
forth, into the direct tax net, or abolish direct taxes altogether, in favour
of a minimal bank transaction tax.
The former will take multiple legislative amendments,
time, and enforcement, prone to corruption afresh.
The latter option is better, not only because it will it
yield more money for government coffers, but because it makes tax-dodging, and
even hawala borne capital flight, unattractive.
If there is no tax to pay, except for those that are
embedded in the indirect taxation system via GST, why would anyone want to hide
the money in cash?
GST, administered digitally online, is expected to plug
evasion and increase the bottom line of the two-thirds of the total collected
via indirect taxes.
And merging the unofficial economy with the official one
will result in gains of anywhere up to double- taking it from $ 2.3 trillion to
$4.6 trillion, with its better corpus to
leverage.
The vast unorganised sector, both rural and urban, will
take to banking for its safety and security, and prefer cashless digital
transmission for its cost savings.
Future moves towards a fully convertible currency, always
resisted because of the fear of capital flight, could, on the contrary, see a
voluntary reverse flow of hoarded money abroad, keen to seek better returns in
the world’s fastest growing economy.
It is a general canard that people would rather continue
working the cash economy, than put themselves to the expense of 1-2% on every
bank transaction.
But to prevent those who would grudge even this paltry
amount, strict ceilings on cash transactions under GST, will persuade them into
entering the consolidated big tent of the economy.
As for those activities that still must be conducted in
cash, there is little difference in taking it out from the bank, as opposed to
from under the mattress.
For: The Quint
(754 words)
December 1st, 2016
Gautam Mukherjee
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