ECONOMIC HIGHLIGHTS

   11 August 2005, New Delhi.

Tapping Black Money

NO MORE AMNESTY SCHEMES, PLEASE

By Dr Vinod Mehta

With the revenue earnings falling below the expectation level and the expenditure on mitigating natural disasters by the administration increasing, the Government is again mulling over the question of tapping black money to generate resources. One of the options being considered is to allow interest-free deposit scheme with the lock-in period of three years or more. The other option is to ask the depositors to furnish information even if their earning is less than Rs.5,000 per annum as interest.

Surprisingly, over the past 50 years no Government at the Centre has been able to tackle the menace of black money. A number of amnesty schemes have been announced to unearth this money but it continues to grow. This only shows that no Government had the political courage to tackle this problem, and that over the years’ black money as a percentage of the GDP has continued to grow.

There is no reliable estimate of the quantum of black money in the country. Several scholars and committees have tried to make an estimate. The first such scholar was Prof. Nicholas Kaldor, who estimated the quantum at 6% of the GDP during 1952-53. Thereafter, the Direct Taxes Enquiry Committee, known as Wanchoo Committee, put the figure at 4.2% of the GDP between 1962 to 1968-69, while its member, Dr. D.K. Rangnekar, estimated more than 8%. For 1980-81, the National Institute of Public Finance and Policy (NIPFP) estimated 18 to 21% of the GDP, while Prof. S.B. Gupta gave the figure of 45.8%. For 1987-88, he put the figure of 51.7% of the GDP.

Differences in estimates notwithstanding, the important points highlighted by these studies are that: the quantum of black money has not only been growing in absolute but also in relative terms as a percentage of the GDP; black income has grown from 6% to 51% of the GDP in the past 50 years; the rate of growth of black income generation is faster than the rate of growth of the GDP, and finally there has been no political will to tackle this problem. It’s not that there is no tax evasion in other countries, but it’s not to the extent of 51 per cent as is here. For instance, the tax evasion in the US is about 2% of the GDP.

In 1998, the Voluntary Disclosure of Income Scheme, (VDIS) was introduced to mop up black money. Under it, the Government was able to garner over Rs 10,000 crore as tax revenues on disclosed income. This was hailed “a great success”, as earlier amnesty schemes could all together collect only Rs.500 crore. But, this made no dent in the black money. It is, therefore, surprising that the Government is considering coming out with some sort of another amnesty scheme. What is the guarantee that it will mop up the black money in circulation? An amnesty scheme will be viewed by honest tax payers as an award to evaders for concealing their income. But it needs to be tackled once for all.

The nation will seriously need to think of how to handle the problem.  Apparently, it will need to be tackled at two different levels. One, it will have to see how to drastically reduce the black money in circulation and, two, how to stop its generation. Therefore, taking into account the quantum of black money in circulation, the country will have to adopt a mix of fiscal and administrative measures. Amnesty schemes are unethical and, in fact, penalise the honest tax payers.

The easiest way to tackle the problem of black money is to demonetize the currency.  But, this is unlikely to achieve the desired result, as a large sum of this has been invested in real estate, gold etc. Also, the cost of printing new currency for immediate circulation may be quite prohibitive. But, this option may need to be used to knock out a large proportion of black money around. A few countries have done it in the past, with Russia being the latest.

However, it would be more useful to use administrative methods to tackle black money, even if these may appear to be harsh. The Income Tax Department may be strengthened with trained staff to specially detect black money and book the culprits. Perhaps, a special kind of intelligence bureau to detect economic crimes, like tax evasion, may be set up. Thus, the revenue administration would be able to first gather facts about tax evasion from this agency and corner the tax evader, rather than carry out raids on hunches.

Similarly, harsh measures such as attaching of property of the tax evader, denying of Government contracts to evaders, compulsory jail and so on, could be adopted by the administration. One may ask: why such harsh measures? The answer: soft measures have not worked in the past and even the disclosures in the 1998 VDIS, according to some analysts, were only tip of the iceberg.

As for stopping the generation of black money itself, the Government will have to work on various measures simultaneously. As a first step, the entire tax structure will have to be revamped.  The proportion of indirect taxes in the total revenues will have to be reduced, while the proportion of income taxes will have to be increased.  To begin with, there is a case for reducing excise duty and other taxes on items of daily use such as edible oil, soaps, toothpastes, biscuits, etc. and on processed food items like frozen vegetables, fruits, meat, canned juices, jams, soups etc.  These items are not consumed by the rich alone but also by those on limited incomes.

As for income tax, there is not only a case for further reduction in tax rates and widening of tax net but also simplification of the tax system. While reducing the tax rates, the tax net should be spread wider to cover incomes of agriculturalists, small traders, shopkeepers etc. 

It has also been observed that there are many companies which have not paid a single paisa of tax for the past several years, because of loopholes in the tax rules, especially the ones relating to depreciation. This needs to be looked into seriously. The loophole should be plugged and these companies forced to pay taxes.

An administrative measure, which can go a long way in curbing the generation of black money, is to assign every individual and a corporate entity an identification number (different from PAN number), like the one assigned to houses or vehicles and make it mandatory that all payments, above a certain amount, be made through banks.

The identification number will have multiple uses once it is all computerized. It can be used for admissions in schools and colleges, for electoral rolls, for opening bank accounts, for getting passports and so on.

If the use of this number is made compulsory for every single financial transaction--be it sale and purchase of goods and services, loans, gifts, payment of medical bills, purchase of air or rail tickets, payment of wages, salaries and perks etc.--as well as on other occasions, it will make tax evasion very difficult, for both an individual or a corporate entity.

Since the registration of births and deaths has been made compulsory, it should not be difficult to administer the identification system, especially in this age of computers. Identities could be established within minutes of individuals or corporate entities conducting business anywhere in the country. And, it would be easier for the revenue administration to get requisite information on their financial transactions by asking institutions such as banks for details. This system is not new. In the US, the social security number has similar multipurpose uses.

The rooting out of black money and stopping its generation should be high on the Government’s agenda. There is no need to show mercy to tax evaders; no more amnesty schemes. Enough, is enough.--INFA

(Copyright, India News & Feature Alliance)