While it is true that Rs 500 and Rs 1,000 notes are one of the biggest facilitators of black money transactions and unaccounted income, but the real challenge is to curtail the creation of black money, and for that, Prime Minister Narendra Modi must look at the restructuring of income tax slabs in the next Budget.
Prime Minister Naredra Modi gave another example of his mastery in execution of a closely-guarded plan of his government yesterday when he took everyone by surprise by announcing the withdrawal of Rs 500 and Rs 1000 notes to curb black money and deal with terror funding.
Given that high denomination notes are one of the biggest facilitators of black money and, “while the total number of bank notes in circulation rose by 40% between 2011 and 2016, the increase in the number of notes of Rs.500/- denomination was 76% and for Rs.1,000/- denomination was 109% during this period”, as pointed out by the finance ministry release; the government had to act at some point of time to deal with this situation.
PM Modi has chosen to tackle it in his own style to fulfill his 2014 Lok Sabha poll promise and there is no doubt that implementation of this measure in a forceful manner is a courageous move that can impact the Bharatiya Janata Party fortunes adversely – even though, there is a belief that the step has been announced to deal with the use of money power in the upcoming Uttar Pradesh assembly elections and will help the party.
Whatever be the reason, he must be commended for the move considering that the World Bank estimated the black money in India to be 20.7% of the GDP in 1999, and rising to 23.2% in 2007.
PM Modi, obviously, is under pressure to show results of his black money initiatives as the government scheme to bring out black money stashed abroad failed to yield much, though the domestic version of it, Income Disclosure Scheme that ended on September 30, is being seen as a success as Rs 65,250 crore has been disclosed through this.
But, beyond all this, the government must now strike at the root cause of black money – the income tax structure must be altered to promote more and more people to pay taxes.
While the top rate of 30%, at present, is kicking in at an annual income of just Rs 10 lakh, the income between Rs 5 lakh and Rs 10 lakh is taxed at 20%, and Rs 2.5-5 lakh is taxed at 10%.
The limit for imposing 30% rate must be raised to Rs 20 lakh if Rs 25 lakh means revenue loss that government can’t bear, and the other slabs should also be raised suitably, along with the necessary curtailment of exemptions, on the lines proposed by the Direct Taxes Code.
If PM Modi wants to tackle the creation of black money effectively, it is crucial to announce a plan to decrease the overall personal income tax burden in the next Budget to be presented in the first week of February 2017.