Not very long ago, the favourite whipping boy of successive finance ministers was the law-abiding taxpayer. Every year FMs, regardless of their political stripe, would propose new ways of squeezing those who paid their income tax, bearing down on the legitimate white economy to earn more revenue rather than attacking the rampantly growing black one to eradicate it. Budgets routinely had proposals to scrutinise transactions such as credit card purchases, cheque payments, bank transfers and even fixed deposits, all of which involved money that was lawfully accounted for. That sort of approach, instead of dissuading people from resorting to unaccounted transactions, encouraged them to avoid tax and generate black money. Part of the problem was (and continues to be) the very small number of Indians — 35 million (less than 3% of the population) — who pay taxes, leaving FMs with little choice than to squeeze the law abiders.
Arun Jaitley’s budget attempts to reset that inverted logic. The more publicised feature of his budget’s plan has been a law that could impose stiff punishment (including rigorous imprisonment) on those who stash their black money overseas — a law that many argue harks back to the days of stringent foreign exchange regulation and one that could be misused by those entrusted to implement it. But it is another announcement that deserves more attention: the proposal to encourage people to use debit or credit cards for transactions and discourage them from doing cash deals. Many estimate India’s black money to be as much as a third of its GDP and, never mind the hype about Swiss banks deposits, more of that swirls around within our national boundaries than outside.
Look no further than election funding to see how rampant black money is. In May 2014, the Centre for Media Studies (CMS) estimated that around `1.5 lakh crore was spent on elections in the preceding five years. At least half of that (which is roughly double the yearly amount that the government spent on the MGNREGA) was unaccounted for. During the recent assembly elections in Delhi, the city was abuzz with rumours about one party’s candidate who for a month was reportedly doling out `3,000 a day plus free liquor and the use of vehicles to each of his 50-100 workers.
Anyone who has tried to buy an apartment in India will tell you how much cash is involved in such transactions. The taxes and duties associated with real estate actually encourage buyers and sellers to do a large part of the deal in cash. Ironically, taxpayers and salaried individuals wanting to buy property often have no choice but to convert white money into black.
The FM’s proposals to discourage cash transactions and tougher laws to ban benami deals in real estate are a welcome change. Unlike the amnesty schemes of the past that allowed law-breakers to voluntarily declare their unaccounted incomes and wealth, Jaitley’s proposals have a touch of pro-activity — they could be the beginning of efforts to strike at the root of the problem. But a lot more will have to be done. The real estate market will need a regulator, and duties and taxes, which now vary across states, will need to be rationalised.
The other sticky question in tackling black money is how to increase the number of taxpayers. India’s Constitution exempts farmers’ incomes from being taxed but while small and marginal farmers may not earn enough to pay taxes, there are rich (and even super-rich) farmers who could be taxed. The problem is agriculture comes under the jurisdiction of states; also, taxing farm incomes would need a change in India’s Constitution; and, in any case, a proposal to tax farmers, rich or not, will almost certainly lead to a big political blowback. Likewise, in the unorganised sector, which accounts for more than a third of India’s GDP, large swathes slip under the taxman’s radar. If the number of Indians who pay taxes doesn’t increase, those who do may continue to be targeted by finance ministers every year.