The government coming out with the proposal to give tax benefits on credit/debit card payments ahead of the compliance window for disclosing black money, which is expected to be announced next month, is a good idea. Curbing the cash economy will yield better dividends in tackling black money in the country as it is the generation and illegal circulation of ill-gotten wealth that needs to be checked if the government is serious about making a dent in the black money economy.
All the measures proposed in the draft paper issued by the government — income tax benefits on payments made through credit or debit cards – no transaction charges on purchase of petrol, gas and rail tickets with plastic money – mandatory settling of high value transactions of more than Rs 1 lakh through electronic mode – tax rebate for shopkeepers who will accept a significant value of sales through debit or credit cards – will promote electronically recorded transactions.
The income tax department has been collecting information on high value transactions through annual information returns filed by the agencies handling them, and once the tax incentive model comes into existence, a comprehensive data repository will be available to track tax evasion cases. In fact, a large part of the black money can be brought to the book if cash is weeded out of the sectors like real estate and gems and jewellery. But, the government needs to ensure that the taxman doesn’t exploit the information gathered through electronic transactions for harassment and also the service charges doesn’t pinch the consumers’ pocket.
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The efforts in the past to generate transaction trails in these sectors have failed to deliver any significant result and how far incentivizing of the use of plastic money will succeed here remains to be seen, but there is no doubt that insistence on electronic transaction is the way forward to stop black money from growing further.
This is where tracking of the whole GST chain will also help, and that is why the GST needs to be exemption-free. Bringing the whole production chain under the GST ambit will reduce the chances of generating and circulation of black money to a large extent.
The NDA government will do well by implementing these measures earnestly instead of expecting too much from the black money compliance window (2-5 months, as decided by the finance ministry), to allow people to disclose their black money and escape the stringent provisions including prosecution that will be applicable from April 1, 2016. Those disclosing their hidden wealth will have to pay tax at the highest rate of 30% and also an equal amount of penalty to avoid getting subjected to 30% tax and a 90% penalty under the law, which would mean paying 20% more than even the value of the assets that will be discovered, besides prosecution.
Even India’s most successful amnesty scheme – the difference between such schemes and the current compliance window is that you don’t have to pay the penalty — VDIS 1997, succeeded in collecting just 2.3% of that year’s GDP. Going by this experience, a significant number of people might not opt for this route.