Black Money Act 2015 being presented as panacea of reforms is a flop show. There is a fundamental principle of governance that without regulation and conducive atmosphere mere deterrence does not work. While this law is aimed at many things including money laundering, the most highlighted provision is the so-called encouragement to bring black money back to India. The present rate of income tax is 30%. The Black Money Law provide a taxation of 60% if the money is brought back to India. If however the undisclosed income is not brought back to country voluntary, there is further provision for penalties in addition to 60% taxation.
What purpose will this law fulfill:
Stashing of undisclosed income abroad is violation of Income tax laws of country but only impliedly. There was no law prohibiting non-disclosure of income made abroad. This vacuum has always hurt India’s pursuit of money stashed abroad which the host country would not disclose except in case of criminal charges. Thus stashing money abroad itself has been made a crime. This will help the cause of pursuit of money abroad.
Why the black money law is a flop?
Law must be practical and economical. If the price at which law provide a relief can be sought from some other indirect channel, people will not pay high cost. Presently cost of converting black money to legitimate income is about 5% add tax of 30% minus some incentives and deductions, black money can be converted into legitimate income for about 35% and there is hardly any secret about it. At least not for informed people. Tell me why any body will pay 60% and be labeled as a black money hoarders?
Hawala or illegal banking:
Transfer of funds from one country or place to another is a parcelled banking which is illegal. But this is the channel used by all politicians during elections to transmit money. While in open they all denounce it and even term it illegal as violation of Money Laundering Act but in practice the trade is carried out under the protection of police. Do not believe me? Just ask somebody where such trade is carried out and visit. See for yourself.
Thus getting money into country through hawala at less than 1% and about 5% of conversion and 30% of tax later here we are. Rich and legitimate as always.
What went wrong with black money law?
Horse can pull a cart but can not push it. Black Money law is a cart which has no horse of incentive.
High taxation has throttled the people. Most people have stashed their money in assets which are off the grid. Properties are sold at one rate mentioned in the deed and different actual payment. Rate of stamp duty on buying and selling is 10%. The USA had declared independence for far lessor amount/rate of stamp duty. There is property tax, electricity tax, water tax, toll tax, octroi, entertainment tax, luxury tax, professional tax. All these taxes are in addition to income tax of 30%, service tax of 16%, excise/customs duty of 25%, sales tax/vat of 20%.
To say the least, this regime of taxation is CONFISCATORY.
In this disgusting tax regime Minister think that he can inspire people to bring back their money into India? No. Rather this law will spook the bench sitter people to find ways to permanently park funds abroad and legitimise the funds abroad. Unless the problem of heavy taxation is tackled the black money remains the primary back bone of economy and you can not vanquish the primary source at all.
It is unfortunate that all that talk of replacing Income Tax with transaction tax was only an election gimmick. But the ruling BJP may note that their primary constituency is middle class who are waiting for financial reforms with bated breath and if you failed to deliver to them they are going to abandon BJP sooner than expected.