At a 30% tax plus a 30% penalty, the compliance window for black money—the exact dates will be announced soon—is certainly attractive since the penalties will be much higher once the window is closed. Unlike the infamous VDIS black money scheme in 1997 which, in many well-publicised cases, allowed those with black money to get away with paying just a 2-3% tax, the compliance window will see offenders being taxed at the highest tax rate plus a penalty. How well the scheme will do, though, will depend upon a lot of things, and certainly the government’s estimates of black money stocks looks vastly exaggerated. In any case, as the chief economic advisor has been quoted as saying, tackling fresh creation of black money is critical. The maths is simple. Assume the share of the black economy remains the same at the, say, 30%-level it was 5 years ago. So if GDP was R100 five years ago, black money was R30—today, at the same share, the black GDP will be R60, underscoring the need to tackle fresh creation of black money and worry less about the past stock. The other factor that will determine how well the compliance window does will depend upon how scared black-money holders are of getting caught in the future—if they are not, why pay a 60% tax-cum-penalty?
This is where various schemes including the tax concessions to discourage usage of cash come in. In the case of the latter, giving a shopkeeper a 1 percentage point reduction in taxes, say, for making sales against debit/credit card payments is a great incentive. But the flip side is that a shopkeeper who takes this tax credit will have to now deposit the 12.5% VAT on all sales and probably have to make higher income tax payments as well—the economics just doesn’t seem worthwhile for the shopkeeper who will, therefore, discourage his customers from using plastic money. If, on the other hand, the government keeps a track of spending in all forms—air travel, hotel bills, gold purchases, automobile and real estate purchases etc—the story could be quite different since those holding black money know they are more likely to get caught; the CBDT chief has promised such a 360-degree profiling-database of each PAN-cardholder by next year. In the case of income and corporate taxes, similarly, lowering tax rates is critical—India’s highest tax rate bracket kicks in too early and, in the case of corporate taxes, our rates are significantly higher than those in other parts of the world. A well-functioning GST, of course, will do a lot more to check tax evasion since there will be a computer trail of every transaction of, for instance, Titan’s watches, right from the factory gate—so it would theoretically be possible to match the GST/VAT receipts of shopkeepers with factory production and catch evaders easily. As in the case of marketing firms, collecting and then using Big Data is critical for the taxman.