Given that, even if you agree with the Global Financial Integrity numbers, less than 5% of India’s GDP is being siphoned off overseas by way of trade mis-invoicing, finance minister Arun Jaitley has done well to tell the taxmen to focus on black money within the country. Cracking the black money trail to a large extent depends upon the tax policies followed by the government, both at the Centre as well as the states. While estimates vary, a large part of black money generation takes place in the real estate sector. Tackling this requires a combination of things. For one, proper GIS mapping of property across each city is critical, and then super-imposing this with the circle rates as well as the property taxes paid —and put all of this online. Making circle rates more realistic—increasing them to near-market rates—will ensure less black money is generated, and reducing stamp duties will ensure there is less incentive to avoid registering property sales. If you look at income tax data, it is those in the R10-20 lakh income bracket that pay the least taxes. Making the tax levels flatter, so the tax rate doesn’t jump so suddenly as you move from the lower tax bracket to the next, would encourage more compliance. The same principle has to be applied in the case of other taxes such as excise and import duties. In this context, the finance ministry’s plan to re-impose curbs on gold imports and perhaps even hike import duties, is a bad idea, a sure way to increase the generation of black money as higher tariffs will simply encourage more smuggling.
Perhaps the biggest deterrent to black money generation will be the introduction of the Goods and Service Tax since, when it is fully operationalised, a chain of transactions will get created as a good moves from the input stage to that of final consumption. Apart from the fact that this gives the taxman a great database to utilise, the system is self-policing in nature. For any person in the value chain to be able to get a tax set off, the previous person should have paid a tax—this will ensure people will deal only with those who pay taxes. At the end of the day, it has to be recognised that black money is not sui generis, it is a reaction to the system of governance. If the system places a lot of discretion, in allocation of coal mines for instance, people will line up to give bribes, and then find ways to recover this; once there are transparent auctions, to carry on with the coal example, the creation of black money disappears. In removing various exemptions, the Direct Taxes Code for instance, sought to remove discretion since it was up to the tax man to grant the tax benefits—once again, the result would have been less tax fraud and less black money generation.