Battleground for war on corruption

Action of  Prime Minister Narendra Modi stunned the country on Nov. 8 by announcing that 500-rupee  and 1,000-rupee notes, which account for more than 85 percent of the money supply, would cease to be legal tender immediately. The announcement set off days of turmoil as millions of Indians tried to swap their suddenly worthless old notes for hard-to-find new notes of 500 and 2,000 rupees or older ones in smaller denominations.

The Action is a wake up call as Fewer than 5 percent of all Indians file tax returns. Many shop owners use cash for their transactions and don’t declare their income. Wealthy Indians often avoid taxes by paying cash for property and jewellery. Those businesses “are where black money is hidden.

Few immediate positive take away from demonetisation can be

• Banks have received deposits worth Rs 5.12 lakh crore in the 9 days since demonetisation was announced. Government expects this amount to rise to Rs 10 lakh crore by December end.It could now be put to constructive use.

• Lower interest rates help the common man because they result in reduced EMIs for his leveraged assets like home, car and consumer durables. 

• Healthier banks: defaulters are queuing up to settle their loans with old notes. Having put a restriction on the amount that can be deposited in an account, defaulters have preferred to use their cash to repay their loans with no avenues to hide or exchange it. 

• Terror funding choked: There has been no incidence of stone pelting in the Valley ever since demonetisation has been in place. 

• Richer municipalities: Demonetisation has resulted in windfalls for 47 municipalities by pushing up their tax collections. Just like defaulters used their 'hidden' cash to repay loans they are also using it to repay municipal taxes. 

Risks from Demonetisation 

Economy setback in short term

Modi is risking a temporary economic setback from demonetisation. Until the Nov. 8 announcement, GDP was on track to increase 7.7 percent this year, and the government had achieved some important goals in its drive to improve business conditions. Estimates say economy could lose 0.7 to 1 percentage point of growth over a year.

Generation of parallel economy and inspector raj again

• There was a surge in demand for luxury watches after Modi’s sudden announcement as wealthy Indians rushed to make costly purchases with unaccounted cash.

• New gold rush also emerged as within a couple of hours jewellers were selling gold up to 4 a.m  Customers paid as much as 70000 rupees per 10 grams

• Exchange of old currency notes with new ones with the help of bank managers at rate of almost 40% extra

• Money deposited with NBFC and show loan in books of Accounts in exchange of old currency

• Billions of Indian Rupees got changed to dollar and pound

• All level IT officers have been given authority to serve notice on high deposits even if genuine. I can easily foresee harassment of even honest tax payers during assessment.

From above one can easily understand how black money has started generating from day one. Middleman, Chartered Accountants and IT officers are again celebrating Diwali. Their hands full

FM had promised easy taxation but he has let the tax payers at the mercy of IT officers and it is return of inspector Raj 

Why indians avoid taxes

 A common citizen in India feels what does he gets back in return of huge taxes. To illustrate

• Govt failed to provide constant Electricity and forced to buy Generators /Inverters

• Govt Failed to provide clean Water and forced to install Submersible Pumps and aqua guards

• Govt Failed to provide Security so either hire own security Guards or live at risk

• Govt failed to provide Good Education so send children to private Schools 

• Govt Failed to provide Good Hospitals so rush to private Hospitals 

• Govt failed to Provide good Transportation so buy own cars

• Govt failed to provide social security at old age. Rather hard earned money is used by political parties to distribute subsidies and free distribution among masses to buy free votes.

• Major Tax revenue of Taxes are eaten by Government Officials and Politicians . A manufacturer works at a margin of between 2% to 10% , whereas government needs 30% of his income to cover it's expenditures. How fair it is all??

That's the reason no one wants to pay Taxes 

ALL HIDDEN MONEY IS NOT ILLICIT

While, in the public eye, piles of cash are synonymous with corruption, we should be careful to distinguish between three components of the black economy. 

• Underlying source of corruption. An example of this would be the high stamp duties on real estate transactions that lead to payments in cash.

• Methods adopted for storing unaccounted wealth. An example of this would be holding assets in gold. 

• For years method through which transaction are effected. This could involve cash.

The black economy involves all three elements. Targeting the unaccounted cash on one particular day is only a small part of the story. There is a game of musical chairs being played. One one day the music stopped playing, and the persons who were holding the cash were penalised by 25% to 50%. Can we set our sights higher: can we disrupt the entire game?


REAL WAR AGAINST CORRUPTION

The main focus of the war on corruption should be to go after the core corrupt activity. 

GOLD

We can setup police stings upon thousands of jewellers and millions of their customers. But it would be better to eliminate the customs duty and solve this at the root cause. Customs duties are "bad taxes" and should go.


HAWALA

The hawala business came up in the 1960s and 1970s in response to capital controls that came up as part of Indian socialism. We can setup police action against everyone involved in this illegality. But it would be better to kill the hawala business at the root cause.

REAL ESTATE

Cash payments are favoured so as to avoid the stamp duty. Stamp duty, like the customs duty, is a `bad tax' and should go, and the real estate sector should be merged into the GST.

TAXES

A new Corruption free tax regime is required, which sets up the CBDT/CBEC with sound processes for their legislative, executive and quasi-judicial functions, and their top level governance. Taxes other than the income tax and the GST, at the central level, should be removed. 

ADMINISTRATION

Arbitrary power is the root cause of corruption. We have to be cautious when persons in government have the discretion to change a rule, give a license, conduct an investigation, or hand down punishment.

POLITICS AND ELECTION 

Running a political party and fighting elections requires large scale resourcing and use of black money. Fundamental reforms are required, in order to change over to a political system grounded in white money. This will also take us beyond family dominated political parties and encourage professionals to be part of politics