Within a month of historic and revolutionary decision of demonetization [scrapping of 1000/500 rupee notes] announced by prime minister Modi on November 8, 2016, the government launched an ambitious scheme called Pradhan Mantri Garib Kalyan Yojna [PMGKY] on December 16, 2016 ending on March 31, 2017.
The scheme was contemplated in the backdrop of an unprecedented amount of cash held by the public in these high denomination currency notes having been deposited in banks. The perception of the authorities – very rightly so – was that this could not be pure transaction money kept by public to meet routine requirements [or savings of housewives, they normally keep in cash].
Considering that the amount deposited in excess of Rs 200,000/- in each account aggregated to over Rs 700,000 crores, it was abundantly clear that this was black money representing income that was concealed from income tax department or this was simply proceeds of the corruption money or any other wrongdoing/illicit transaction.
The government wanted to give such persons another opportunity – having already given them one chance via Income Declaration Scheme [IDS] during June 1 to September 30, 2016 – to come clean by paying tax at prescribed rate plus some contribution to welfare of the poor. Under PMGKY [also known in common parlance as IDS – II], a person can pay 50% tax on the deposit amount and give another 25% as interest free advance for 4 years. To enable this, it made necessary amendment in the Income Tax Act.
Persons who do not avail of the scheme but declare the ‘undisclosed income’ in their return for the assessment year 2017-18 [corresponding to financial year 2016-17] will have to pay tax @60% plus surcharge @25% plus penalty – all adding to a total of over 85%. Further, those who don’t declare the amount even in their return and are caught by I-T department during search and seizure, will have to shell out much more which could even exceed 100%.
Given the attractiveness of the scheme vis-à-vis the bitter pills which apart from higher tax also include prosecution, it was expected that the depositors would avail of the scheme in droves. But, it has turned out to be a damp squib. The amount collected under PMGKY is less than Rs 4000 crores. This is 1/6th of tax collected under IDS – I [Rs 24,000 crores @45% on disclosure of Rs 53,000 crores].
An answer to this puzzle has to be seen in juxtaposition with the reasons behind success of IDS – I. When, that scheme was launched in June, 2016, prime minister had issued a stern warning that this was a last opportunity to hoarders and if they did not avail of it, the authorities will deal with them sternly post September 30, 2016 [the last day of that scheme] as per provisions of IT Act.
That warning sank deep in minds of black money mongers who declared a total of Rs 66,000 crores [the figure eventually came down to Rs 53,000 crores after adjusting for a major aberration in a disclosure from Gujarat]. But, post September 30, the government did not execute the threat. Instead of unleashing the might of the tax department on the hoarders, it decided to change tactics. It was keen on making their cash hoarding worthless.
So, the prime minister made a sudden announcement about demonetization. The government thought that this would automatically kill a large amount of cash [about Rs 350,000 – 400,000 crores] as fearing huge penalty and even imprisonment in an eventuality of their being caught with this undisclosed money, the hoarders would simply let it go in to dumps. To that extent, this would give a bonanza to Reserve Bank of India [RBI] by way of extinguishment of its liabilities. Being the owner of RBI, the money will eventually flow in to the coffers of the union government. But, that did not happen.
Almost all of the cash lying with public [in 1000/500 rupee notes] was deposited in banks during the 50 days window which was meant only for genuine persons to either exchange [albeit for new currency notes] or deposit in bank accounts their hard earned savings. Clearly, even hoarders came in droves to deposit their black cash. Partly, this was due to a ‘loophole’ in extant provisions of the I-T Act which enabled them to declare it as ‘windfall’ income in current year [2016-17] and get away by paying normal tax @30%.
The finance minister, Arun Jaitely did the right thing by getting necessary amendment passed to plug this loophole. But, he committed a blunder by coming up with PMGKY/IDS – II. He not only backtracked on an earlier pronouncement at the time of rolling out IDS – I that there won’t be a repeat of such a scheme but also, kept IDS – II pretty liberal. For someone who was a violator and even ignored an earlier warning, a tax rate 50% applicable to deposit under the scheme could only be termed as an allurement.
Still worse, it sent a wrong signal to black money mongers that the government was not so strong; that it could shower its benevolence yet again at some future point of time. They also took it to mean that the I-T department may not strike as strongly as initially anticipated. Hence, they had no interest in availing of the scheme. Unlike IDS – I when they feared strict action in the follow-up, that fear had disappeared by the time IDS – II was unveiled.
In retrospect, the original game plan of Modi – government to get the hoarders burn/dump hundreds of thousands crore [courtesy, demonetization] has not worked. Instead, that money has come to the banks but they continue to own it. Could they be made to declare in their returns and pay up at least 85% as per the amended Act? This is unlikely; those who did not opt for IDS – II – a lesser pain – why would they opt for a more painful option on their own volition?
The only logical course now is to go hammer and tongs after them. On January 31, 2017, the Central Board of Direct Taxes [CBDT] started a project ‘Operation Clean Money’. It is chasing 1800,000 persons whose deposits post-demonetization did not match their returns profile. It has also conducted searches/seizures and identified close to Rs 10,000 crores undisclosed income. But, the outcome so far is nowhere near the scale needed to clean up the system.
While announcing demonetization, Modi had promised something very big. He had vowed to bring back hundreds of thousands crores looted by offenders for decades and use it for giving a push to development and welfare of the poor. Half of the mission has been achieved with the money having come to banks. Now, he needs to speed up action to ensure that this gets transferred to government’s treasury.
Any laxity in this regard will not only deprive it of the much needed resources for development and people welfare but also dent the legitimacy of demonetization.