A prosperous ruler will govern the state well, take up welfare activities for the people and promote
commercial activities with the result that soon the people will also become
prosperous- Chanakya
Last year India celebrated 25th anniversary of the
economic reforms initiated in 1991. Though these reforms accelerated economic
growth, it failed to usher in secular growth. The rich mainly harvested the
benefits of the reforms. Consequently, India continues to remain very low in
the UN’s Human Development Index with the poor and needy largely remaining so.
Last year (HDI-2016), it was ranked a poor 131 among 188 countries.
In the past three years, serious efforts have been made to
take the reforms to the next level, with the goal of benefitting those who were
so far in the fringes of economic growth. The main pillars of this strategy are
inclusion, transparency and decentralisation. The efficient implementation of
these three pillars, would for the first time, take the benefits of growth
directly to the people, bypassing the rich with whom the growth had virtually
stopped.
Of these three segments, perhaps, transparency is the most
important prerequisite for secular economic growth. Dispassionate examination
will point at corruption as the main culprit that failed every well intentioned
program. Corruption or ‘Bribery is not a small crime, it takes food off the
table, it prevents education, it impedes proper healthcare and ultimately it
can kill’- said Jose Ugaz, chair of Transparency International. Corruption breeds
black money and together subvert welfare programmes, restrict the flow of
finance to the government, constricting its ability to formulate and implement
programmes and discourage foreign investment that brings money and technology
for economic development, generating job opportunities in a nation struggling
to give employment avenues to its young population.
Black money, according to the white paper on black money
submitted to the parliament in 2012, by CBDT, are assets or resources that have
neither been reported to the public authorities at the time of their generation
nor disclosed at any point of time during their possession.
According to the World Bank, corruption is public enemy
number one in the developing world and the poor pay the highest percentage
of their income in bribes. India has been no exception. A survey, conducted by
Transparency International in 2017, found 69 per cent in India as saying they
had to pay a bribe, the highest in the Asia Pacific.
Two pronged strategy of crusade against black money and of devising
innovative methods for delivering benefits directly to the targeted
beneficiaries, has helped create an anti-corruption architecture which would
reap phenomenal fiscal and social dividends in the near future.
Towards a Clean Economy:
India’s tax to GDP ratio is a mere 16.6%, with a tax base of
around 5.5 crore persons which includes companies, individuals and other
business forms. As per the economic survey 2016 -17, India has only 7 taxpayers
for every 100 voters. The tax evasion is glaring from the fact that while more
than 1.25 crore cars were sold in the last five years; more than 2 crore
individuals travelled abroad in 2015 alone, mere1.72 lakhs individuals reported
income more than Rs.50 lakh for tax purposes.
Black money generated through tax evasion is an economic
challenge as well as a social menace. While it harbours bribery, electoral
corruption, organized crimes and ostentatious consumption it distorts economic
planning and financial integrity of the nation. On the whole it deepens the
economic inequality and corrodes the social fabric of the nation. Government
has taken a slew of measures, almost amounting to waging of war against black
money, in the past three years. These involve policy-level reforms through legislative
and administrative initiatives, effective enforcement, capacity building, and
building intelligence through data mining.
|
Tax Administration for a clean economy
Following path breaking measures have been taken to address
the menace of black money:
·
Special
Investigation Team (SIT)– headed by former SC judge M.B.Shah was formed to
probe black money.
·
‘The Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015’ with
stringent penal provisions including rigorous imprisonment of 3-10 years has
been enacted to effectively deal with the issue of black money stashed away
abroad. Tax evasion has been made a predicate offence, under Prevention of
Money Laundering Act (PMLA).
·
Rs 8,186 crore, illegally kept in offshore banks by Indians, has been
brought under tax ambit despite several constraints;
·
Multi-Agency Group (MAG) was set up for facilitating coordinated and
speedy investigation of cases of Panama Papers leaks;
·
Signing Double Taxation Avoidance Agreements (DTAAs)/Tax Information
Exchange Agreements (TIEAs)/Multilateral Conventions etc. with other nations
·
Joining Multilateral Competent Authority Agreement in respect of
Automatic Exchange of Information to
support global efforts against black money
·
Signing information sharing arrangement with USA under
its Foreign Account Tax Compliance Act (FATCA)
·
Renegotiation of DTAA with Mauritius, Singapore and Cyprus to curb
treaty abuse, tax evasion and round-tripping of funds
·
Participatory Notes (PN) though bring foreign investment, but have been
red flagged as a conduit to route black money back into the country by SIT on
black money. SEBI mandated increased disclosure requirements and restricted
transfer of PN to curb money laundering in order to keep track of their
beneficial owners.
·
Enactment of Benami Transactions (Prohibition) Amendment Act, 2016’
which empowers the government to confiscate benami properties—assets (without
any compensation) held in the name of another person or under a fictitious
name. The act has a provision for imprisonment up to seven years. As per
Department of Revenue, more than 245 benami transactions have already been
identified and provisional attachments of properties worth Rs.55 crore have
been made in 124 cases.
·
23064 searches / surveys have been conducted (Income Tax 17525; Customs
2509; Central Excise 1913; Service Tax 1120) to detect tax-evasion of more than Rs. 1.37 lakh crore (Income Tax
69434; Customs 11405; Central Excise 13952; Service Tax 42727).
·
Launching prosecutions in 2814 cases leading to arrest of 3893 persons
·
ED registered 519 cases and conducted 396 searches leading to arrests
in 79 cases and attachment of properties worth Rs.14,933 crore.
·
64,275 declarants made disclosures of Rs 65,250 crores under the Income
Declaration Scheme (IDS), 2016 which provided a chance to domestic black
money holders to come clean.
Budget 2017-18 – ‘Transform, Energise and Clean India’
Taking forward the crusade against black money Finance
Minster proposed following major reforms:
·
Cash expenditure upto Rs 10,000/-only is allowed as deduction to
businesses.
·
Charitable trusts can receive cash donations upto Rs 2,000 only from a
single source
·
Restricting cash expense to Rs 2 lakhs only for a single transaction
and in case of violation a penalty of equal amount would be levied
·
Primary Agriculture Credit Societies which are susceptible to misuse by
parking black money, are to be computerized and integrated with the Core
Banking System of District Central Cooperative Banks.
·
Exemption from long-term capital gains tax has been restricted to
shares on purchase of which Securities Transaction Tax has been paid (and
other “genuine cases” such as public offers). This will clamp down on tax
evasion through “sham transactions”
·
Proposed legislation, to confiscate the assets located within the
country, of the offenders, including economic offenders, who fled from the
country till they submit themselves to law of the land.
·
Aadhaar has been made mandatory for filing of income-tax returns as
well as for obtaining and retaining the PAN. This would solve the problem of
multiple and bogus PAN and strengthen KYC verification for different
transactions including opening of bank account as linking of PAN with bank
accounts has been mandated
Rewarding Honest Taxpayers
While the government aims to increase the tax base it is
striving to build a predictable and
stable taxation regime so as to be investor friendly and growth spurring.
Following are some of the noteworthy initiatives/policy changes towards
better tax administration:
·
Without forgoing its sovereign right to undertake retrospective
legislation government has made it very clear that it would exercise this
with extreme caution and judiciousness
·
E-assessment has been launched in 7 cities in order to reduce physical
interface between tax payer and the department along with cost and time of
compliance.
·
‘E-Sahyog’ launched in 2015 to provide an online mechanism to resolve
mismatches in Income-tax returns of those assesses whose returns have been
selected for scrutiny to be expanded to reduce compliance cost, especially
for small taxpayers.
·
CBDT and CBEC to issue periodic clarifications on tax laws, on the
recommendations of a High Level Committee setup to interact with trade and
industry
·
Resident taxpayers can also obtain an advance ruling in respect of
their income tax liability above a defined threshold.
·
Scope of the Income-tax Settlement Commission has been enlarged so that
more taxpayers can avail this opportunity.
·
Time bound grievance redressal through PMO monitored ‘Centralized
Public Grievance Redress and Monitoring System (CPGRAMS)’ and 'e-nivaran' portal
·
One page ITR form ‘Sahaj’ for select taxpayers
·
Income tax Department is working on the ‘Project Insight’ to
strengthen non-intrusive
information-driven approach for improving tax compliance and speedy
investigation
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Demonetization
Surgical strike on black money launched through
demonetisation of high denomination currency of Rs 500 and Rs 1000 led to a
regime shift by punitively raising the costs of tax evasion and striking at the
roots of corruption. It was also aimed
at countering fake currencies, greater digitalization of the economy, increased
flow of financial savings, and greater formalization of the economy, all of
which could eventually lead to higher GDP growth, better tax compliance and
greater tax revenues.
Post demonetisation, almost all cash has entered the banking
system providing scope to the law enforcement agencies to keep track of the
money trail. Investigation of cash
deposits have uncovered various fraudulent practices including back dating of
sales, benami deposits, sale of jewelleries, bullions, luxury goods and
forex to unidentified persons (without
PAN), splitting of bills to avoid reporting of PAN, depositing in cooperative
banks ( which do not have stringent KYC norms), deposits in multiple accounts
against single PAN etc.
Data have shown that deposits between Rs 2 lakh and Rs 80
lakh, totalling to Rs 5.48 lakh crore were made, during demonetisation, in 1.09 crore accounts. A
total of Rs 4.89 lakh crore, comprising deposits of over Rs 80 lakh, entered
into 1.48 lakh accounts. As part of Operation Clean Money, the
department of income tax sent e-mails and text messages to 18 lakh individuals
in the first phase. Response from 12 lakh accounts have been received on the
department’s e-filing website. This would help the department to eliminate
genuine cases from further investigation. In a written reply to the Rajya
Sabha, Finance Minister stated that the Income Tax Department has seized cash and
valuables totalling Rs 600 crore in 1100 searches and survey operations
conducted post demonetisation.
Giving a chance to come clean, Government announced Pradhan
Mantri Garib Kalyan Yojana under which those who declared cash
deposits, (till 31st March, 2017) could pay a tax of 50% and deposit
25% of the amount declared into the noninterest-bearing PMGK Deposit Scheme for
four years. There are no official data yet on the PMGKY. Irrespective of the
numbers, it is important that a frame work was provided to common people to
regularise the cash which they had come to possess unwittingly.
Digital economy
The predominance of cash in the economy is the major reason
of large scale tax evasion. According to a 2015 report from PwC, 98 percent of
all transactions by volume and 68 percent of the total value of transactions
are conducted in cash in India. Demonetization has given a quantum push to
digital transactions. While the advantages of digital economy are many, it
inter alia creates transparency. Top ranking countries in the Corruption
Perception Index of Transparency International have reported less than 10% of
the total transaction in cash. India stands at a distant 79th
position in this ranking.
The National Payments Corporation of India has successfully
implemented the Unified Payments Interface platform which facilitates
inter-operability; BHIM (196 lakh people have downloaded it) and Aadhar Pay
will facilitate peer-to-peer transactions and digital payments over the counter
respectively.
In order to incentivise digital transactions, presumptive
rate of income tax for non-cash
transactions of small and medium tax payers with turnover up to Rs 2 crores been has brought down from
8% to 6%. Further government exempted BCD, Excise/CV duty and SAD on POS
machines and micro ATMs.
While the government has mandated the linking of PAN with
Aadhar, as a further step it may consider compulsory Aadhar authentication for
cash transactions beyond Rs 50,000/-.
Goods and Services Tax (GST)
GST, one of the biggest tax reforms post-independence is
aimed at simplifying the complicated indirect tax regime. It will create a
common Indian market, streamline tax administration, improve tax compliance,
boost investment and growth and result in higher revenue collection; by
subsuming all indirect taxes (other than custom duty) levied by the Central and
state governments. With the passing of four bills related to GST in the
parliament, GST came a step closer to meet its July 1st target of
rollout. With a state of art GST information technology architecture and
provision for stringent penalties and prosecution for tax evasion, India may
see a surge in tax to GDP ratio in medium to long term. Further correct
reporting of business transactions would automatically lead to buoyancy in the
direct tax collection.
Electoral Funding Reforms:
Political parties received Rs 7,833 crore funding from
unknown sources between 2004-05 and 2014-15, which is 69 per cent of their
total income, as per the report of the think tank, Association of Democratic
Reforms, leaving us to guess the unknown sources. Political funding by
industrial and business houses, when shrouded in secrecy, is the breeding
ground for vested interests. It nourishes the unholy nexus between the politics
and the business, forcing the politician to return the favours, subverting
democracy and people’s will. Thus transparency in political funding is
essential for clean economy.
A small beginning has
been made in the budget 2017 by limiting of cash donations to political parties
from a single source to Rs. 2,000/. The concept of electoral bond has been
proposed whereby corporate donations will be kept anonymous safeguarding the
interest of donor but the source can be traced.
Bypassing Corruption
Interestingly, government while mounting a frontal attack on
black money hoarders has simultaneously initiated steps for insulating the poor
from corruption and bribery by innovating the delivery systems.
Since independence welfare schemes have proliferated with the
aim of taking the fruits of development to the poor and the needy. However the
malaise of corruption has spread over the years throughout these schemes
resulting in massive leakages and filling up the pockets of the undeserving.
The Economic Survey for FY 2015-16, for instance revealed that 40-50% of the
benefits under the flagship scheme of PDS is lost due to leakages. The
government has found an innovative mechanism to transfer the money value of the
benefits directly into the accounts of the deserving poor, bypassing corruption
called Direct Benefit Transfer (DBT). Massive drive was launched in 2014 to
take banking to the poor and under privileged. The structure of DBT is being
erected on the trinity of Jan-Dhan (around 25.7 crore accounts opened), Aadhar
(crossed 112 crore enrolment) and Mobile.
It has been reported that presently, 84 schemes in 17 ministries are
covered under the DBT saving 50,000 crores over last three years. Uploading the
list of beneficiaries for anyone to verify could be the next step to bring
further transparency. Government has also streamlined and removed scope for
grand corruption by mandating auction as the only route for allocation of
natural resources, through amendment of Mines and Minerals (Development and
Regulation) act and by launching Government eMarketplace (GeM) for procurement
of goods and services by the Government Ministries/ Departments, PSUs, and
autonomous bodies. Such measures attack the source of corruption and augment
resources for nation building activities.
Unfinished agenda:
While applauding the courage and conviction of the government
for a ‘Clean India’, the steps taken are only illustrative and not
exhaustive. Corruption and black economy being deep rooted in our ecosystem
require sustained and systemic solutions. Few indicative steps are suggested
below:
·
Simplification
of tax laws and procedures is sine qua non for effective and corruption free
tax administration. It should leave least scope for discretion and litigation.
It was revealed in the budget speech of 2016-17 that 3 lakh tax cases are
pending before the 1st Appellate Authority with disputed amount being 5.5 lakh
crores.
·
Prevention of misuse of legal persons
is another area that requires strengthening. Shell companies have mushroomed
over a period of time abusing the simplified corporate procedures. Hundreds of companies are registered in a
single address. Typically they have low capital, single or no employee and
directors who are men of no means. Over the years such shell companies have
established well a system of producing fake bills, providing bogus share
capital, bogus loan and for that matter they are used for faking any financial
transaction. They are hard to detect because of the sheer numbers and when
detected hard to prove under the existing evidentiary standards. During the period 2013-14 to 2015-16,
IT investigations led to detection of more than 1155 shell companies / entities
used as conduits by over 22,000 beneficiaries involving non-genuine
transactions of more than Rs. 13,300 crore. However there have been mixed
results before the courts of appeal on the cases filed against these companies.
It would do well to think in the direction of defining such offences as running
a shell company and faking financial transactions as organised crime and enact
a penal law to tackle the same.
·
Reduce
human interface between the tax men and the tax payers. Minimal interaction
that is permitted should be standardised and amenable to oversight by higher
authorities. E assessment initiated by the IT department is a step in the right
direction.
·
The
Financial Action task Force (FATF), in which India is a member, has recommended
that nations should consider requiring their financial institutions to identify
their business relationships with politically exposed persons (PEPs) (persons
entrusted with a prominent public function )and put appropriate risk
management system in place as a
preventive measure.
·
Promote
seamless coordination among law enforcement agencies at the centre and the
state level.
Sustained effort is required:
The pain caused while
implementing various measures are only ephemeral while the benefits will be
enduring, leaving a legacy of transparent and corruption free architecture for
our future generation.
Green shoots of long term
benefits are already seen in the RBI data which shows that UPI based
transactions jumped 20% to Rs 2000 crore in March’17.
The challenge is to accelerate the momentum as the nation’s
aspirations for faster and inclusive development can be achieved only with a
clean and transparent economic system. Most
importantly, government having launched a war against black money should fight
it to the finish lest it shall not resurge!
Note: This article was published in May'17 issue of Yojna. This article was co-authered with Smt M V Bhanumathi, IRS.
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