Prime Minister Narender Modi’s detractors criticise him for what they term as the 'demonetisation fiasco' that ended with 99.3 percent of the high denomination notes finding its way back into the banking system -- aggregating to a whopping Rs 16 lakh crore or 86 percent of the currency in circulation. They, however, betrayed ignorance and arrogance---assuming blithely that all bank deposits are ipso facto legit or get sanitized.
The Modi government seems to be having the last laugh. It has scrutinized major deposits and sent out notices to around 11.5 lakh depositors, asking why they should not be deemed to be benami properties and punished accordingly. More than 90 percent of deposits of demonetised notes are believed to be in benami names like drivers and other sundry servants. Punishment is more severe and quicker under the benami law than under the income tax law.
The second feather in the Modi government cap has undoubtedly been the ushering in of Goods and Services Tax (GST) with effect from 1 July 2017. It has worked wonders for the exchequer with monthly tax collections averaging Rs 95,000 crore falling short of the expected by just Rs 5,000 crore. That target that would be achieved sooner than later especially if the compounding scheme is made friendlier thus collecting massive amounts from the last mile small sellers dotting the Indian marketplace.
The third achievement of the Modi government, the one that was made possible through the pincer of demonetisation and the back-to-back GST, has been the surge in direct tax collections (read income tax).
According to the income tax return data released by the CBDT, the number of individuals whose income was above Rs 1 crore was 81,344 for the year ended March 2017 — a jump of 20 percent from 67,783 in 2015-16. This, once again, was on the back of demonetisation which put the fear of god into some of those who deposited their ill-gotten wealth in bank accounts blithely. They felt it is better to disclose it as their income rather than face the ignominy of prosecution under either the income tax or benami law.
There is also a better utilisation of the annual information report (AIR) filed by banks, mutual funds, registrars and sub-registrar registration of immovable properties. To wit, any property registered for Rs 30 lakh or more is flagged by the sub-registrar to the Income Tax Department. Ditto for mutual fund investments in excess of Rs 2 lakh with a fund house.
Tax evaders are an excitable lot. While they quietly evade tax, they cannot refrain from investing. AIR then is what the doctor has ordered. It proves to be a fecund source of information about the daredevilry of tax evaders. The noose is tightening around them as well.
There is a concern, misplaced though. Indirect taxes collections are still hovering around 52 percent which means direct taxes are only 48 percent of the total tax collections. Indirect taxes like GST are essentially regressive affecting the poor more like the ongoing rampaging fuel price hike shows. Direct taxes, on the contrary, are progressive, hitting the rich more. But then these are early days.
GST has unleashed a torrent of entry into the mainstream of the economy of the hitherto cash-and-carry businesses. They would soon find resonance with greater force on the direct taxes collections as well. That said, the Modi government would do well to revive wealth tax and estate duty, the twin taxes that can bolster the revenue of the government.
The Foreign Intelligence Unit (FIU) is said to have upped its ante and is investigating into the foreign assets of Indian residents who are in any case obliged to disclose such assets in their income tax returns. The black money law of 2015, unlike earlier amnesty schemes, is a standing piece of legislation that extracts 120 percent tax from those stashing their ill-gotten assets abroad in addition to subjecting them to a 10-year prison term. The investigation, however, might prove to be difficult as foreign governments -- some of whom can be hostile, do not always cooperate.
Furthermore, Indian investigative agencies are usually out of their depths when the money trail goes to foreign shores. But this time around, the focus is more on the remittances under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI) in 2001 with a modest permission of $25,000 which later has ballooned to $2,50,000 per year per individual. This includes both current and capital account payments as well as investments and education of children. One suspects this was the escape route that came handy to those wanting to evade taxes.
The Modi government is grappling with current account deficit on the foreign exchange front. It must stop this hemorrhage forthwith by stopping the automatic remittance route and bringing back case-to-case permission.
The tax department’s analytics is proving to be working. Its software is able to track tax evaders splurging through credit cards besides identifying professionals like lawyers who do not declare their income fully but whose clients disclose all their expenditure. This back-to-back correlation of expenditure and income is required to end rampant tax evasion, especially by the professional class.
E-assessment or assessment through software is yet another feather in the tax department’s cap. It leaves a large number of honest taxpayers severely alone even while refunding the excess tax paid in record time, often within two months of filing the return. At the same time, the e-assessment software is potent enough to flag off abnormal transactions showing up in the income tax returns or not showing up at all.
All in all the Modi government has done remarkably well on the taxation front and its subset black money. The results have already started showing. But it is a work in progress.
(The writer is a senior columnist and tweets @smurlidharan)
Updated Date: Oct 24, 2018 12:02 PM