The Gimmick Man

High denomination notes have been demonetised with immediate effect and this has created a great news splash in the country. However, what will this really achieve? Most of the black income that is generated is kept in the form of real estate, gold and undeclared financial instruments such as insurance policies and only a part as cash. For instance whenever there are vigilance raids on businessman or corrupt government servants by the tax department or the anti-corruption wing, most of the undisclosed income unearthed is in the form of property and only a small part is cash. The really big players in the black economy all use offshore havens to stash the better part of their black incomes and use the hawala track to transfer cash to India as and when this is required. Thus, only a part of the huge store of black income will be neutralised through this demonetisation. It will have little effect on the generation of black money which will continue apace. Especially since the golden opportunity to curb black money generation by introducing a single flat rate of Goods and Services Tax has been given the go by.
As things stand there will effectively be as many as nine slabs of GST - no tax on essential commodities, 6% on mass use commodities, 12%, 18%, 26% on luxury goods, special tax on gold, special tax on petroleum products, cesses on various sin goods and cesses for education and Swacch Bharat Mission. There is already a big fight going on between the centre and the states over the classification of goods under these various slabs which will later be followed by even greater litigation between the tax authorities and the tax payers. The big problem will be that a huge bureaucracy will have to be maintained both at the centre and the states to administer this complex system of taxes as at present. The argument that it is necessary to have a differential tax rate with no or low taxes for essential and high volume goods so as to not burden the poor and also control inflation is a specious one. A low single flat tax on all commodities will not only not have an inflationary or anti-poor effect but will hugely reduce the cost of administration and also improve greatly the tax collection as it will be very difficult to avoid paying this flat tax. Such a flat tax will also easily end the turf war that is now going on between the centre and the states as to who is going to collect which of these taxes and from which category of tax payers. When there is a single flat tax then it only boils down to deciding on the cut off line for the cumulative amount of tax that a tax payer pays to apportion the tax payers between the centre and the states.
Once the GST system is simplified and all economic transactions become tracked then it will be very easy to determine the high value expenditures being made and track those who are making them through appropriate algorithms for the same. The huge tax bureaucracy can be redeployed from administering the indirect taxes to tracking the high value expenditures and so ferreting out the high income people who are not declaring their incomes. Thus, both the direct tax base and the total collection will go up substantially and we will have a much better direct to indirect tax ratio and a total tax to GDP ratio like it is in the developed economies. This would enhance the revenue of the government and its ability to spend for equitable and sustainable development of the country.
Like in the case of the Swacch Bharat Mission or the Digital India initiative, in this case too Prime Minister Modi has not gone into the nitty gritties of the issue and made a big announcement around demonetisation which is yet another gimmick!! It is indeed a pity that people in this country fed on the inane fantasies of Bollywood films lap up these gimmicks without realising that they are not going to achieve anything substantial.