Narendra Modi, the Prime Minister of India, a man well-travelled throughout India and now the world, has a penchant to throw solutions at people as examples of change, while exhorting them to accept challenge and find solutions. Modi may be accused of anything but not lack of sufficient knowledge about any subject. The reason is clear, as shared by him publicly, he likes to keep himself uptodate by seeking knowledge from books/net or people alike.
Modi has for the first time shown himself to be clueless about one subject: Income Tax and black money generation. He has no clue how large is the off the book or cash economy of the country.
In the last episode of radio talk ‘Man Ki Baat’ or Talk from heart he has warned people to declare their black money by last day of September 2016, the date fixed or else there may be severe consequences. May be he knew yet he chose to bluff to people! Or may be he believed in what he said!
If it is the second then Modi does not know the extent of problem. People may declare some or may be coerced to do it by Income Tax Officers, especially in small towns. Reports are pouring in that rich communities of traders e.g. Jewellers are being threatened to declare some black money lest there will be consequences. Somebody claimed it happening here in New Delhi as well but more of a request not coercion.
There is nothing new in the declaration scheme. Such schemes of declaration of black money are launched every decade and meet marginal to moderate success but black money grows as usual. Why?
Problem of black money.
Black Money is not a problem. It is a solution to many problems. It is a parallel economy which is created to solve many problems which is to stay off the radar, at least partially.
India is a highly taxed economy. First of all there is a tax of inflation which is 5% at best to 14% for worst during last Government. Excise tax is 30% plus vat or sales tax about 10%. Add 30% of Income tax. Now out of every rupee earned and spent 70% goes to these three taxes. In fact there are many other taxes: Octroi, Property tax, service taxes, luxury tax, entertainment tax, just to name a few. There is tax on transfer of property, gift and what not.
It is impossible to buy a property in India without making half the payment in cash. That is a truth and the Government after Government want us to believe that it does not know it. This situation exists because of too much Governance and corruption in Government Official who benefit from higher taxes and higher evasion.
Blindside of Prime Minister.
Irony of the situation is that Prime Minister Modi said that we are in a low tax regime now. He is wrong. It may be lower than Indira Gandhi regime but what was lowered in Income tax was replaced by service tax and many more taxes.
Worse part of taxation system is that while super rich pay the same rate of tax as a middle class with a salary of just one million every year. There must be a windfall profit tax for those who earn too much. Sorry Sachin, Dhoni and Bachchan your country needs your extra money!
Income tax collection.
92% of income tax is voluntary. Just 8% of tax is collected by the department housing 42000 people on salaries ranging between 45000 to ₹2,50,000/- What a fun? I Wonder how much money is spent on this department. Mr. Modi have you ever thought of making it completely and truly online?
If Modi had ever filed a single Income tax return himself he would know the hassles. I challenge the entire cabinet of Narendra Modi to sit in public with their bank passbook and bills and show people that they can file returns online without any Chartered Accountant. It is impossible to do so. All will fail. It is so complicated.
Black money declaration scheme.
Like all financial and legal actions of which have failed, this scheme is another failure. The reason is that this scheme is stupid. Sorry no other word is apt.
There are many reasons. To begin with, who would like to be labelled as a tax thief. Further there is absolutely no trust with corrupt Income Tax department. Nobody believes in so-called confidentiality of declaration. Nothing can remain secret if submitted to Government.
Last reason is pure maths. Would you pay 45% tax when you can pay 30% and without being labeled as a thief?
Arun Jaitly is a great lawyer but in poor health. He is no economist. As Finance Minister he is toyed by bureaucrats with their flop ideas. GDP growth story of 7.4 looks suspicious when we look at other figures.
Of course RBI is also a trouble but that does not absolve Finance Minister for failure to bring out a single out of box idea. If coercion of people for making this scheme a success continues, the BJP will miss a large chunk 300 million middle-class and its traditional voters. In result people of India will miss Narendra Modi as PM of India.
Income tax reforms.
Finance Ministry is always hijacked by Bureaucratic agenda of keeping jobs. Any reform in Income Tax laws means lesser jobs in a key department. Needless to say the cash, tax-free income of these officers who wield powers of harassment in multiple layers. Present Finance Minister is also a complete failure to break this Jinx. Rather the Prime Minister is also entrapped in same colonial income tax regime.
Worse part is that in pre-election rally the speakers sharing dias with Modi had offered to replace income tax with transaction tax. But now we hear nothing about it.
To be or not to be?
Yes Prime Minister
The Prime Minister has chosen a dangerous gambit. Abandoning his own middle class voters and choosing lower/working class voters who vote on caste lines. Will it work? That is a billion people question waiting to answer in about three years.
Personally I guess that from next budget, there will have to have a change. With enough liquidity, Government can start some reforms in h=this system of taxation especially when indirect taxation reform by way of GST appears to be a reality from next year, if it is passed by Parliament next week.
Is it about dirty money?
After I had compiled and published the above article, a friend suggested that this exercise is not for bonafide regular taxpayers who may have some suppressed income. Rather this scheme is aimed at dirty money. People who are involved in illegal trades like bootlegging, gangsters, drug traffickers, property mafia and all sort of rotten people like public servants who has bribe money etc. If this is so, this scheme is even more dangerous. I have read the relevant Rules and could not find any thing in the rules which compels a person to disclose source of income. Even if it does, one could simply write business or trading in mangoes or whatever.
This is interesting. Launder your dirty money @45% tax. Now it is irresistable.