1. Black money no longer cool due to demonetisation, but real issue is plight of SMEs hit by note ban, GST combo

Black money no longer cool due to demonetisation, but real issue is plight of SMEs hit by note ban, GST combo

A year after demonetisation, while the anticipated windfall of Rs 2-3 lakh crore—tax evaders were expected to not deposit their black money—did not materialise, the focus now shifts to the taxman being able to tax this black money that got deposited in bank accounts.

By: | Updated: November 6, 2017 9:07 AM
black money, demonetisation, noteban, notebandi, corruption, india corruption In the near term, however, the economy has been disrupted, first, by the acute shortage of cash in the economy—even if it was for a temporary period—and, subsequently, by GST. (PTI)

A year after demonetisation, while the anticipated windfall of Rs 2-3 lakh crore—tax evaders were expected to not deposit their black money—did not materialise, the focus now shifts to the taxman being able to tax this black money that got deposited in bank accounts. Most of the demonetised cash came back into the banks, but there is now a record of individual wealth, by way of balances in bank accounts, and that should help to track black income. The taxman’s track record in catching tax thieves is poor, but given the numbers put out on suspicious deposits, it looks as if this time may just be different. Even if the success rate is poor, certainly tax collections will rise. Since tax thieves are claiming the money they deposited was genuine income from sales, they will pay taxes on this additional income.

More than that, there is no denying that demonetisation, and various policy measures after that including GST, have changed peoples’ attitudes when it comes to using cash—most important, demonetisation let tax thieves know the government was serious. While cash continues to be used for small purchases, given the restrictions on the amount of cash that can be withdrawn at a time, and the compulsory linking of banks accounts and PAN cards with Aadhaar, it would appear many more big ticket purchases are being done in the digital mode. There is greater awareness the government is monitoring larger transactions and it is going to be that much harder now to not pay one’s taxes or file returns. In August 2017, to cite one number, transactions via pre-paid instruments stood at Rs 10,300 crore as compared to Rs 5,340 crore in July 2016. The usage of debit cards at PoS machines has also gone up to Rs 35,400 crore from Rs 17,000 crore. And this will get another push now that GST now a reality, and will thereby bring more firms into the formal economy; over time, this should help boost tax revenues.

In the near term, however, the economy has been disrupted, first, by the acute shortage of cash in the economy—even if it was for a temporary period—and, subsequently, by GST. The cash shortage almost paralysed the operations of small- and mid-sized units which typically transact in cash. Although the GST rules are being changed to accommodate the interests of smaller businesses—the scope of the composition scheme, for instance, is likely to be raised to Rs 1.5 crore from Rs 1 crore—there will be many firms that were earlier not paying a central excise duty, a VAT or a service tax, but will now need to do so. But if the tax arbitrage was their main competitive advantage in the past, their future is now at risk; being in the formal economy also entails other costs such as higher wages, EPFO deductions, etc. They could choose not to get formal, but in a post-GST world this will mean larger companies may stop sourcing supplies from them. The process of formalisation will, of course, mean SMEs will find it easier to get credit, and at lower rates. Whether this will be enough to balance the negatives of higher tax and other payments remains to be seen. Over the long term, it is obvious an economy can’t afford to have enterprises whose major USP is tax-theft, but in the short-run, the disruption is large and will have an impact on both output and jobs.

  1. Harvinder Maini
    Nov 6, 2017 at 9:59 am
    Modi has wasted three years and hard earned money of Indians and is still continuing his foolishness. It is better to show him way out of Parliament as soon as possible, if we want to save India.
    Reply

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