Barring some short-term hiccups, the master stroke delivered by prime minister, Modi by way of declaring 1000/500 rupee notes as invalid will have a substantial positive impact on the economy. The precise quantum will of course depend effectiveness of the strategies unleashed by Team Modi [including amendment to I-T Act] to counter the maneuvers of black money holders to convert their black in to white.
Modi has many more projects up his sleeves [including a frontal assault on real estate, bullion and foreign currency holdings] which he will execute from the start of next year. This should result in extermination of a lot more of black money and garnering more resources for financing development and helping poor.
Having dwelt a body blow to the existing ‘stock’ of black money, it is equally essential to cut in to the sources and dynamics/modus operandi of its generation. If, this is not done then, a few years from now the monster will show its head yet again. There is a compelling need for this from yet another angle.
Already, die-hard opponents of Modi [they are the ones under whose dispensation, this monster grew by leaps and bounds] are lambasting him for what they dub as ‘doubling amount of black money generation’ by bringing in 2000 rupee currency notes [they refuse to look into the technical, logistics and safety reasons behind this]. So, by taking timely action, he can nip such criticism [baseless] in the bud. Herein, two areas merit urgent attention.
First, government needs to completely halt leakage of funds from welfare schemes for the poor that was happening on a gargantuan scale till Modi took charge. If, only we apply an off-the-cough formula given by former prime minister, Rajiv Gandhi that ‘only 15 paise out of a rupee actually reaches intended beneficiaries’, the leaked amounts will run in to hundreds of thousands crores every year.
These funds were appropriated by corrupt politicians and bureaucrats and thus turned in to black money. Modi’s demonetization master stroke has extinguished this stock of black. He has also taken steps to stem leakages, most important being transfer of subsidies and other financial assistance directly in to accounts of beneficiaries using JAM [Jan Dhan–Aadhaar–mobile] platform.
The second major fountain-head of black money is what prime minister described as the infamous ‘kachaa bill’. This euphemism is used for a piece of paper that a retailer/trader invariably gives to the consumer against purchase made by the latter. This document has no legal sanctity whatsoever and is used by him to avoid showing the sale transaction on his books.
The maximum retail price [MRP] at which product is sold includes all taxes levied by centre and states viz., excise duty [ED], sales tax/VAT etc besides retailer’s margin. While, ED is included in the price at which the retailer lifts stock from producer [who deposits it with excise department], collection of sales tax/VAT from the consumer and depositing it is former’s responsibility.
By not showing the sale in his books [courtesy, kachaa bill], the retailer takes this out of legal/legitimate system and need not have to deposit the tax proceeds with the state. This not only leads to his unjust enrichment albeit at the cost of the exchequer [e.g. if VAT component in MRP of Rs 120 per unit is say Rs 20, this is pocketed by him] but also creates black economy to the tune of Rs 120.
Considering that majority of sales [in many cases, these could be a high of above 90%] are done against kachaa bills, the tax denied to state governments would run in to hundreds of thousand crores and quantum of black money thus generated would be many times more. Additionally, there is loss to the centre by way of income tax foregone as the dealer won’t reflect those sales in his business income either.
Quite often, a dealer entices customers by giving a discount over the MRP. While, the latter feels that former is doing him a favor, in reality the discount is coming out of the tax portion that should have gone to the government [e.g. out of Rs 20 VAT, he may pass on Rs 10 as discount and retain balance with him]. In this scenario, both retailer and consumer become party to defrauding the exchequer.
Irrespective of whether the customer gets a discount or not, by not insisting on a proper bill – a bill that has the transaction identification number [TIN] of trader – he unwittingly becomes a party to generation of black money and defrauding the central and state governments. This has been going on for several decades and is perhaps, the most important reason for low tax to GDP ratio of only 16% in India which is less than half of developed countries.
Not taking a bill for purchases made is a practice that has got deeply impregnated in the mindset of majority of consumers. It won’t go away merely vide education, awareness campaign to make them understand the serious implications. This will require rigorous administrative action by officials of sales tax/VAT and I-T department.
These departments must have a data base of all retailers/vendors [including those who operate from extensions/encroachments on public place next to regular shops] and ensure that they all have TIN numbers. The officials need to carry out checks to ensure that dealers issue proper bills and maintain records. The reported sales need to be cross-checked with their purchases and stocks to ascertain the authenticity of sale figures.
We can get intended results only if the officials are men of impeccable ‘honesty’ and ‘integrity’. In a governance set-up that had got thoroughly corrupt over the years [VAT and I-T departments included], this is going to be a huge challenge. Modi – government will have to devise innovative strategies and systems to get a contingent of officers who measure up the requirements.
True, GST slated for introduction from April 1, 2017 will bring all transactions on taxman’s radar even as anyone keen not to report will be left out of GST chain and won’t get credit for taxes paid on his purchases. So, he will be forced to do proper billing for every sale. Besides, he can be traced by looking at e-register of person making supplies to him/her.
However, considering that tax dodgers have mastered the art of circumventing even best systems, the government needs to take utmost precautions and an overriding requirement for this is to have a dedicated force in tax department that is above board, free from all allurements and puts nation first while performing duty.
Will Modi succeed in smashing the cult of ‘kachaa bill’? One can only wait and watch.