Note ban: PMGKY isn't another amnesty scheme, but a cleverly devised foil to tame crooks

The income tax (second amendment) Bill 2016 passed by the Lok Sabha on 29 November 2016 is a logical sequel to demonetisation of Rs 500 and Rs 1,000 notes announced on 8 November considering as it does the necessary catalyst to make demonetisation translate into mainstreaming of the economy which indeed was its object. Yes, it could have been announced concomitantly with demonetisation broadcast to the nation by the Prime Minister. But then it is never too late.

Representational image. AFP

Its main feature is Pradhan Mantri Garib Kalyan Yojana (PMGKY) a seemingly yet another pusillanimous amnesty scheme that mollycoddles the crooks. But a deeper and dispassionate analysis would show that it is neither raising the white flag by the government nor an attempt at humoring the crooks. It exacts a steep price---49.9 percent---to be precise for laundering black money into white. In that sense it is a follow up on the income declaration scheme that ended in September 2016 which too exacted a stiff 45 percent from crooks to launder their black money into white. In addition it is going to impound 25 percent of the deposits during the specified period for poverty alleviation measures by the government by way of a four-year fixed deposit without interest.

The Modi government has wisely eschewed the maximalist position. It could have very well thrown the gauntlet at the crooks saying if you dare to deposit your black money we would go for your jugular. Faced with such a threat, crooks would have slunk away setting store by the adage discretion is the best part of valor. That would have ended up in the demonetised notes going up in smoke both figuratively and really. Now at least 50 percent of them is going to be mainstreamed, bankrolling and fuelling the economy.

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Indeed the success of the demonetisation scheme hinged on the follow up amnesty scheme, the one that exacted a stiff price from crooks. Congress which taunts the BJP with launching a 50:50 scheme must remember that the amnesty schemes operated by it in the past by and large left the crooks with a slap on their wrists---30 percent tax. What makes PMGKY unique is it is an excellent foil and adjunct to the demonetisation scheme.

Crooks also would settle for a pragmatic compromise and not press for the maximalist position---we would deposit the demonetised notes in fictitious names mainly Jan Dhan accounts that can pass off as the exempt agricultural income. To be sure, the new amendment does not in terms refer to the demonetised currency notes but the drift and implication are clear---the PMGKY window would almost fully be operated with the demonetised notes.

The Modi government deserves a pat in the back for taking series of steps in mainstreaming the economy. Converting the cash economy into bank economy would go a long way in the mainstreaming effort together with the upcoming GST regime. In fact the two make for the pincer---transactions through banking channels makes tax evasion difficult and GST by keeping tab of the entire transaction trail as a precondition for set off of the tax on inputs already paid puts paid to the idea of purchase without invoice i.e. outside the books, so to speak. While GST disciplines the trade, accent on banking disciplines both the trade and households.

Indeed the mainstreaming of the economy has just begun. The former Prime Minister Manmohan Singh made an uncharitable remark---the nation is going to suffer a 2 percent drop in GDP due to the Modi government’s alleged pigheadedness in soldiering on with demonetisation without putting the alternative currency regime in place. Yes the public could have been spared the pain but then the inconvenience and loss of GDP would prove to be ephemeral and transient.

The mainstreaming of the economy would see a fuller GDP being captured including the GDP that defied precise computation thanks to it being emanating out of the dark, black and opaque economy. Sorry Mr Singh in the long run we may all be dead but Gennext is going to benefit immensely from the mainstreaming of the economy and its subsets GST and demonetisation.