Prime
Minister Narendra Modi’s surgical strike on black money took place through
demonetisation on November 8th 2016. It was claimed that this would
lead to a substantial amount of black money held as cash not being deposited
and so the liability of the Reserve Bank in this regard would be cancelled out
and this would accrue as a windfall dividend to the Government to pursue
greater economic development. About Rs
15 lakh crores were in circulation as Rs 500 and Rs 1000 notes at the time of
demonetisation. In the absence of any rigorous measurement a conservative
estimate is that the extent of the black economy is 50 percent of the official
GDP. Thus, Rs 7.5 lakh crores was estimated to be the black money that would not
be deposited resulting in a huge dividend to the government. Unfortunately,
disregarding all warnings of dire consequences that would follow if citizens
deposited demonetised notes of more than Rs 2.5 lakhs in cumulative value in
savings accounts and more than Rs 12.5 lakhs in current accounts, people
deposited all their demonetised notes and so eventually 100 percent of the
notes were deposited and the Government did not get its expected windfall. On
the contrary by having to print notes in replacement in a hurry to replace all
the demonetised notes the Government incurred an expenditure of Rs 15,000
crores which reduced the dividend it gets annually from the RBI because of the
profits earned by the latter from its money market operations.
The goal
posts were then shifted and it was claimed that all those who had deposited
money in excess of the prescribed amounts would be identified and prosecuted
and in this way eventually the black money that was deposited would be traced.
The investment in the information technology enabled wing of the investigation
department of the Central Board of Direct Taxes was racheted up considerably to
analyse the huge data of deposits that were coming in from the banks. As a
result the following data was gleaned –
1. 18 lakh accounts had deposits of
demonetised notes greater than the prescribed amounts
2. 11.44 lakh Permanent Account Numbers
(PAN) were found to be duplicate and were deactivated.
After this action was taken as follows -
1. Notices were sent to all those who
had deposited more than the prescribed amount asking them to explain this and
about 12 lakh people filed responses.
2. Based on these responses notices
were issued to 3,04,910 persons who had
deposited more than Rs 10 lakhs in savings bank accounts and had not disclosed
this in their income tax returns.
3. As a result 2,17,557 persons filed
income tax returns and paid self assessment tax
of Rs 6,514 crores while 87,353 persons did not file income tax returns
at all and proceedings have ensued against them.
Thus, even
if all those who haven’t filed returns are pursued and the returns of those who
have are scrutinised, the total tax recovery is not likely to be more than the
Rs 15,000 crores it cost to reprint the notes that were demonetised.
It was also
claimed that the demonetisation exercise and the digital analysis of data has
led to a larger tax base and better tax compliance resulting in greater tax
revenue. The total tax recovered for the financial year 2016-17 in which
demonetisation was carried out has not shown a phenomenal increase. Whereas the
growth in the total direct tax collection in the financial year 2015-16 over that
in financial year 2016-17 was 14 percent this growth had been achieved earlier
also during the UPA regime and had in fact slumped to less than 10 percent in
the first two years of NDA rule. The growth in direct tax collection the
following year in 2017-18 was 17 percent but this too was achieved earlier in
the UPA regime and is not remarkable. Even though there has been a significant
increase in the number of tax filers and so the tax base has increased
considerably, mostly they either file nil returns or they do so to get back
refunds of tax deducted at source and that is why the actual tax collected has
not shown a phenomenal increase.
Finally,
there is the matter of greater digitisation of the economy and the
claim that as a result of demonetisation India would move towards becoming a
cashless economy. This has proved to be another red herring as the money supply
currently is much more than what it was at the time of demonetisation and cash
continues to be king.
The Black
economy is thriving because the troika that is in control of the economy –
businessmen, bureaucrats and politicians, are hand in glove in evading taxes. A
much greater amount of black money is held in the form of fixed assets in India
and abroad and in cash abroad than in cash in India. Thus, a surgical strike
through demonetisation, even if it were to be successful in terms of the
demonetised notes that are unaccounted not being deposited, it would neither
yield much nor would it lead to a reduction in the black economy.
The biggest
problem with ensuring tax compliance is that there are not enough personnel to
check tax evasion. The only way to ensure greater compliance is to conduct
scrutiny and search. However, this requires a lot of time and staff and that is
why the self assessed returns of less than 1 percent of the total taxpayers are
scrutinised and a miniscule few are subjected to searches. Even after this the
tax evaders challenge the decisions of the tax department in courts and so a
huge amount of tax demand is stuck in litigation. The tax evaders know from
experience that the process of scrutiny is a long drawn one and that is why
they didn’t heed the dire warnings of the Government regarding legal
proceedings to follow and deposited all their unaccounted money after
demonetisation.
Apart from
the direct costs to the Government in terms of printing of new notes and the technology
and human power deployed in the already over burdened tax department to trace
the depositors of excess demonetised notes, the economy as a whole suffered. Initially
the whole population had to line up in long queues to deposit their demonetised
notes in banks and thus lost out on their regular work. The iconic photo of an
old man standing crying in front of a long queue underlines this poignantly.
The banks bore tremendous costs as they had to stop all other work and involve themselves in taking in the demonetised
notes and finally the Reserve Bank of India spent a huge amount of time
counting the demonetised notes to arrive at the conclusion that almost all of
them were deposited!!
Especially adversely affected by
demonetisation was the informal economy, where cash is the major medium of
exchange and only a miniscule few transactions are done through banks. Many
small businesses closed down due to lack of liquidity leading to loss of work
for the poor who are mostly employed as casual labourers. It has been claimed that India has continued
to be the fastest growing major economy in the world despite demonetisation and
so it is not true that the economy has suffered. But this is yet another red herring. India is the fastest growing
economy because of its huge population which even if it does not work at its
productive best, nevertheless contributes to the GDP in some way or other. The
chai walas and pakoda sellers are all contributing to the economy even if that
may not be the ideal kind of work they would like to do. So if demonetisation had not
taken place the economy would have grown even faster.
All in all, demonetisation was one of the most
idiotic exercises to have been carried out in recent times and the costs were
borne by the economy and disproportionately by its poorest participants.
No comments:
Post a Comment