The Narendra Modi-led government has taken several steps in the last three years to reform the Indian economy. Many of its decisions were taken regardless of their potential political fallout. These bold steps pertain to eradicating black money on which the government seems to have declared war. It intends to put the Indian economy on the fast track. But the results of the government’s endeavours have not always been up to expectations.
The government’s first important decision, as per the BJP’s poll promise, was related to bringing back to the country black money parked as overseas assets by resident Indians. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 aimed to bring back a few lakh crore of unaccounted money parked as overseas assets. But only 644 declarations were received, and just Rs 2,428 crore was collected in taxes. Ninety per cent of the collections came from just five per cent of those who declared their assets. This meant that the act could accomplish only 5 to 10 per cent of what was expected of it.
In 2016, the Income Declaration Scheme was launched. It gave an opportunity to people with unaccounted income or assets to come clean by paying 45 per cent tax on such wealth. This scheme pertained to unaccounted assets in the country. It was expected that a few lakh crore of unaccounted wealth would be declared, but the government could get declarations amounting to only Rs 55,000 crore.
November 8, 2016, when the prime minister took the bold decision of demonetising currency notes of Rs 500 and 1,000, will be regarded as a momentous day in Indian history. This step was also taken without considering its potential political fallout; large economic gains were expected. The government’s idea was that counterfeit notes of Rs 500 and 1,000 as well as black money will remain undeposited and thus would go out of circulation. It was expected that around three lakh crore of unaccounted notes would not be deposited in banks.
But these hopes weren’t fulfilled and the RBI has not yet declared the final figure of the deposits it has received. It is busy segregating the counterfeit notes and trying to trace the banks which accepted these. The expectation, that the parallel economy of black money will be wiped out, has been belied.
The defunct notes deposited in third-party bank accounts are now being withdrawn and the parallel economy of black money seems to be back. Seen from the perspective of the digitisation of payment systems, demonetisation was not justified.
After it announced demonetisation, the government launched the Pradhan Mantri Garib Kalyan Yojana (PMGKY), 2016. The scheme was launched to enable people who had deposited unaccounted cash in their own bank accounts or the accounts of third parties to make a declaration. Again, only about Rs 12,000 crore of declarations were received — a very small amount compared to what was expected. Emails were sent to around 1.8 million people asking for explanations of the source of deposits of defunct notes in their bank accounts. But this step was not of much help.
The Benami Transactions (Prohibition) Amendment Act 2016 was passed with a view to curb deposits of black money in third party accounts. Under the Act, benami transaction means “where a property is transferred to, or is held by, a person and the consideration for such property have provided, or paid by, another person and the property is held by for the immediate or future benefit of the person who has provided the consideration”.
In small towns and villages, there is a big difference between market value and stamp duty value of properties, particularly land. In most cases, stamp duty valuation is 25 per cent of market value. Suppose a person has unaccounted cash amounting to Rs 75 lakh and accounted cash of Rs 25 lakh. He need not invest in a third party account but can directly buy land in his name and use 75 per cent of his unaccounted money.
These decisions were taken with honest intentions. But there was a problem in their implementation which meant that the results were not upto expectations. A system that has been operating with loopholes for 65 years cannot be changed overnight. People exploited the loopholes in the system to foil moves to demonetise the economy. People allegedly took the help of bankers and also used others’ bank accounts to deposit their unaccounted money. Banks did not make proper arrangements to detect counterfeit currency. Bold steps are not enough in themselves; they must be preceded by proper planning. One hopes that other important decisions like the GST will not be implemented in haste. The loopholes in the system have to be plugged before any major reform is undertaken.
The steps taken by the government in the last three years will surely yield positive results. The stringent provisions of the foreign assets declaration scheme will discourage people from parking unaccounted money in overseas assets and investments. Also, stringent provisions under other laws and the Income Tax Act will discourage people from generating more unaccounted money.
The writer is a chartered accountant