Tax terrorism: Why did Jaitley let his babus take him for a ride with a new, flawed ITR form?

It does not speak well of Finance Minister Arun Jaitley that a badly-designed income-tax return (ITR) form should have been scrapped only after it had done some political damage. Far from simplifying the filing of tax returns – which has been the secular trend over the last few years – Jaitley’s tax henchmen would have ended up turning the clock back had the new ITR forms gone through.

Among other things, the ITR to be used for assessment year 2015-16 (financial year 2014-15) sought details of foreign trips made by the assessee, the money spent on private purposes, details of capital gains, names of all bank accounts, etc. It would have brought tax terrorism closer to ordinary taxpayers than has ever been attempted before.

If this is the way to track potential black money, Jaitley must be living in Cloud Cuckooland.

First, it makes no sense to monitor black money by asking the people themselves to give clues about what they spent on their foreign jaunts. If I have money stashed abroad, I am hardly likely to put all that detail down for Jaitley’s cohorts to come after me.

Second, details about foreign trips made by all Indian citizens are already available with the government, as passport control and immigration authorities capture this data. Details of foreign exchange purchased are already there with the banks (the money is linked to passports anyway), and the Reserve Bank can surely access that information if it wants to. Jaitley, Raghuram Rajan and Sushma Swaraj are surely not on such bad speaking terms that his taxmen cannot get that data from the ministry of external affairs or the RBI?

Third, black money is generated through economic activity, and not merely travel. The traditional ways of generating black money are through the underinvoicing of exports and the overinvoicing of imports. Plus, there are the famous M and P routes, where domestic black money held abroad tends to come back as foreign institutional investment. If Jaitley is so concerned about these routes, all he has to do is rework the tax agreement with Mauritius (the M route) and ban participatory notes (the P note) which allow foreign investors to trade in Indian shares without disclosing their identities. But he knows that the markets could tank if does anything about M or P. Seeking to keep tabs on foreign travellers is just a ruse to fool the people into thinking that he is going after black money.

Fourth, seeking more disclosures from taxpayers actually does nothing to reduce the potential for black money. What it does is increase the bribe rate – which generates more black money. So, instead of tackling big ticket crooks, small-time people will be busy offering bribes to taxmen to overlook their minor transgressions, assuming this is what ordinary foreign travellers have indulged in.

Fifth, the biggest repository of black money in India is real estate. Jaitley has planned tough and menacing legislation to prevent benami land holdings, but we can’t know how that will pan out. Reason: the biggest holders of black money in real estate are politicians, their business partners in crime, the land mafia, and builders. But acting against them will unsettle an entire ecosystem that is vital to economic growth. Going after benami land owners will send real estate prices crashing; this will reduce home values and banks will have to start calling in their loans to home buyers, or ask them to put up more collateral. In a sense, acting against the biggest generator of black money will mean entertaining a phalanx of vested interests who won’t want property prices to crash. This is clearly not something Jaitley will be able to do except over an extended period of time.

The real solution is to make the costs of generating black money higher (by painstakingly gathering economic intelligence, doing deals with foreign banks and governments, and monitoring domestic cash activity), and the costs of complying cheaper. This means tracking the transactions of the rich more carefully, possibly through the extensive use of Aadhaar (after providing privacy protection through the law).

The rich need Aadhaar more than the poor; time to collar them with it.

What Jaitley’s tax babus have done instead is the opposite: they have made the cost of compliance by ordinary taxpayers higher without raising the cost for the crooks. Going after soft targets like foreign travellers in the hope they will incriminate themselves by giving details of their expenses sucks. It puts the onus on taxpayers to prove their innocence rather than on the government to prove something wrong has been done.

Mr Jaitley should ensure that his tax babus do not take him for a ride the next time by providing non-solutions. To get a fix on black money abroad, you need to chase the big guns, not every hapless Indian tourist.