Prime minister Narendra Modi talking of consequences for those who did not avail the income tax disclosure window, in his Mann ki baat radio show, sends conflicting signals to the taxman—should he be cracking down on those suspected of not disclosing their incomes or should he, as the prime minister said at a joint CBEC/CBDT conference a few days ago, be friendly so that taxpayers no longer fear him? More important, given the taxman’s record of exaggerated claims—and the subsequent failure to prove the bulk of these cases—the excessive focus on black money is more likely to end up fuelling tax terror.
Between FY08 and FY15, keep in mind, tax arrears rose from Rs 103,808 crore to Rs 700,761 crore while tax collections rose much slower, from Rs 593,147 crore to Rs 1,244,885 crore—and in terms of arrears, while the disputed amount was around 62% of total arrears in FY08, this rose to 88% in FY15. The reason for the excessive focus on black money, of course, comes from L K Advani using the Global Financial Integrity data to talk of how Indians had $462 billion stashed overseas — yoga guru Ramdev hiked this to an astronomical $8.8 trillion. The lack of success in unearthing black money, however, suggests the emphasis is ill-advised. Of the 628 persons named in the HSBC lists, for instance, 569 have been traced and assessments have been made in 390 cases where over Rs 5,000 crore of undisclosed income has been found and tax demands (including penalties) of Rs 5,800 crore have been raised, according to the April press release from the finance ministry; also, just 637 people declared Rs 3,770 crore of income in the last overseas black money scheme. While these are, no doubt, large numbers, they pale in comparison with the hysterical black-money numbers doing the rounds—indeed, even the most successful scheme, VDIS 1997, unearthed black money equal to a mere 2.3% of GDP in that year as compared to routine estimates of 30-40% of the economy being ‘black’ trotted out regularly.
Instead of focusing on unearthing black money, either stashed in India or overseas, the taxman would do better to concentrate on why India’s tax-to-GDP ratio is falling, and on ways to improve this. Between FY08 and now, the ratio has fallen from 11.9 to 10.6 which works out to lost taxes of Rs 176,000 crore in FY16, a number that is several times higher than any black money unearthed and, more important, grows each year. To understand this, assume a GDP of Rs 100 and a 30% black economy. If GDP grows at 15% a year, even the same 30% black component will mean the size of the black economy will double to Rs 60 in five years — in other words, tackling current tax evasion is far more important than finding black money stashed away. This is why it is important to get more taxpayers in the tax net and do the 360-degree profiling the CBDT chief has promised—a few years ago, the taxman showed that while just 14.6 lakh people said they had an income of over Rs 10 lakh, over 16 lakh made credit card payments of over Rs 2 lakh and 52.4 lakh spent more than Rs 2 lakh to buy mutual funds. The finance minister would do well to relook the tax exemptions of Rs 45,000 crore on Section 80C alone, to fix the tax brackets so as to encourage tax compliance; along with 360-degree profiling, a well-functioning GST will provide a computer trail of every transaction and will be a lot more effective than any ‘crackdown’ on black money.