What the Media Did Not Tell You About the Black Money Scheme

rupee

The Income Declaration Scheme(IDS) which ended on September 30, 2016, led to the declaration of Rs 65,250 crore of black money. Black money is essentially money which has been earned but on which taxes have not been paid.

The declarations will be taxed at the rate of 45 per cent and hence, are likely to net the government Rs 29,362.5 crore, over the next year. Half of this amount will have to be paid during the course of this financial year by March 31, 2017. This basically means that the government will get Rs 14,681.25 crore, in this financial year. The remaining amount has to be paid by September 30, 2017.

The media, as usual, has gone on an overdrive, highlighting the success of the scheme. One comparison that has been made is with the Voluntary Disclosure of Income Scheme(VDIS) of 1997, the last black money declaration scheme offered by the government.

The October 2, 2016, Mumbai edition of The Times of India ran a graphic around this on its front page (given the number of advertisements that appear before the front page these days, one can hardly call the front page a front page these days). This graphic essentially said that the Income Declaration Scheme of 2016 has been 3 times bigger than VDIS of 1997. The logic for this is very straightforward. The total amount of black money declared under the VDIS 1997 was around Rs 33,000 crore. The tax collected on this at the rate of 30 per cent amounted to around Rs 10,000 crore.

The tax to be collected in the Income Declaration Scheme is three times at close to Rs 30,000 crorer. An editorial in The Economic Times published on October 3, 2016, states: “This is three times as much as the revenue garnered from the amnesty scheme of 1997.”

The trouble with this analysis is that it is very simplistic. The Indian economy now is significantly bigger than what it was in 1997-1998. The nominal GDP (a measure of the size of the economy) was 9.4 times bigger in 2015-2016 in comparison to 1997-1998. But, the total amount black money declared is only 2 times more (Rs 65,250 crore now in comparison to Rs 33,000 crore then). The tax collected is likely to be three times bigger.

Shouldn’t these basic factors be taken into account before declaring that tax collections are likely to be three times bigger? Also, the total number of declarants of black money in 2016 are 64,275. As per this Outlook story, the total number of declarants of black money in 1997 were 4.7 lakh.

The number of declarants in 2016 are way fewer than 1997, primarily because the black money declarations are now being taxed at 45 per cent against 30 per cent earlier. If the tax on the black money had been fixed at 30 per cent, the total number of declarants would have been more.

The trouble is that once we take all these factors into account, then the situation no longer remains simplistic. And once the situation is not simplistic, straightforward headlines which newspapers specialise in become difficult.  After taking all these factors into account, it is not so straightforward to say that the tax collected is three bigger.

Another factor that the media missed out on is the rise of the services sector as a part of the overall economy. The share of the services sector in the GDP has risen from 47.5 per cent in 1997-1998 to 59.93 per cent in 2013-2014.

As Arun Kumar points out in The Black Economy in India: “The services sector lends itself to black income generation since a) valuation of activity is difficult and b) it has a large component of the unorganised sector in it.”  Hence, it is safe to say that the total amount of black money as a share in the economy has risen over the last two decades.

Once these factors are taken into account, the Income Declaration Scheme no longer seems like the success it is being made out to be. Although it must be said that the government’s effort to tap into domestic black money has been much more successful than its effort to tap into black money that has left the shores of this country.

Last year the government had launched a black money window for foreign assets. Taking advantage of the compliance window, 644 declarants declared assets and income of Rs 4,164 crore in total. This meant that the government was able to collect around Rs 2,498.4 crore (60 per cent of Rs 4,164 crore) as tax revenues.

In comparison to this the Income Declaration Scheme for domestic black money has definitely been a success, but in the overall scheme of things, it is clearly not the success that it being made out to be.

Also, one danger that remains with all income declaration schemes is that they make the individuals who pay tax on time, year on year, look like idiots. Such schemes essentially tell people that as long as you are willing to pay a small penalty in the years to come, you can postpone the payment of taxes by paying a small penalty.

The Comptroller and Auditor General looked into the declarations that were made under the 1997 scheme and made some interesting observations. As it said: “The track record of declarants showed a clear scenario where they were found to have taken advantage of earlier Amnesty Schemes too…The Scheme was not in the interests of revenue and in fact it provided one more opportunity to dishonest assesses to pay tax at a preferred rate and then retire to the old habit of concealing income.”[i]

But for governments the black money amnesty schemes are an access to easy money, instead of making the more difficult decisions like shutting down loss-making companies (which to its credit the Modi government has started to push now).

To conclude, the real success of the scheme will be in the data that it will end up collecting. It needs to be made sure that the 64,275 individuals who have declared black money under the scheme, continue to pay tax in the years to come. That will be the real success of the scheme.

Hopefully, it is also the last of such schemes and in the years to come the government uses more and more information technology on expenditure data, in order to identify those who have black money and get them to cough up their share of taxes and fines. In the long-term, the only way of getting people to pay taxes is to get them to respect the system and at the same time ensure that the income tax laws are made simpler.

Postscript: If you want to read about black money issue in detail, subscribe to The Vivek Kaul Letter.

[i]A.Kumar, The Black Economy in India, Penguin Books India, 1999

The column was originally published on October 3, 2016, in Vivek Kaul’s Diary

Advertisements

About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: