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

Oct 3, 2016

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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 of the comparisons 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.

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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.

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

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek 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. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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6 Responses to "What the Media Did Not Tell You About the Black Money Scheme"

Mani

Oct 4, 2016

Modi Govt said , All the Black Money will be credited back to Every Indians who is having Bank asccount ( App Rs 1 Laks - I beleive), Will they credit me a proprtional amount got from the recent black money declaration quickly. My Bank is stealing money from Account under various names Like: SMS Alert charge, ATM card annual charge, Card swiping charge, ATM usage Charge etc. To compensate , I am waiting for the Black money to be credited to Bank account.

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Dilip

Oct 4, 2016

I do not understand what you want to say by writing this article.you are political comment or having affiliation with Congress.
You people talk of closure of sick PSU, but what about private sector.How much NPA in Pvt sector. It is whose money? Nobody talks of theirs issue.Private promoters are thief's.Hardly 50 business houses worth.Others manipulate the balance sheet & stock prices.So what government should do shut both Pvt. & Government units & invite foreign companies,because they are efficient.Our judiciary,police,IAS,media,traders,businessman are chor.

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Vivek Kaul's Diary

Oct 3, 2016

Dear Mr Kaul::: I would like you to know I enjoy reading your writings ; I always get a fresh perspective. Also at 88 years I am fond of writing to mY extended family and circle of friends through my Rotary membership and fondness for golf and other sports.
My family all voted to stay on in SECULAR India. I am happy at large aspects of our country's progress. Though there are still large areas needing positive attention.
I am attaching my suggestion for attracting black money titled BLACK INTO WHITE. i HOPE YOU WILL LIKE THE IDEA. Also I hope we can meet for an exchange of ideas. I am keen to contribute to our nation's growth, however small my contribution With thanks and best wishes,
SULTAN FAZELBHOY, AN iNDIAN NUSLIM AND NOT A MUSLIM INDIAN ....






SULTAN FAZELBHOY
Saras Services, 63, Mori Road, Mahim, Mumbai 400016
E : sarasmahim@yahoo.co.in T : 24453010 M- 9322991248



BLACK INTO WHITE 08-06-14

A TEMPTING level of black money is stashed abroad. Some are recommending an amnesty scheme. I am totally against it. As an alternative, I suggest that the money can be brought back PROVIDED 80% is invested in a project in a state other than that of the defaulter, to promote the concept of ONE INDIA. This should be in the sphere of HEALTH CARE, specially in villages, and for Dalits. The second area should be EDUCATION, primary & higher ,specially girls.

If desired the project can carry the donor family name. Why only 20% to remain with the defaulter? Because he / she has already saved around 30% on Income Tax, and maybe earned a return during the years gone by.

The total funds should be kept in an escrow account and the 20% money released to the defaulter only after completion of the project duly certified by an authority selected under Anna-ji's scheme against corruption
Imagine the good that can be achieved by this route !
(Words 166)

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Vijay Kastoori

Oct 3, 2016

65000 Cr declared by 65000 defaulters. ie on an average just Rs 1 cr / person.
Only the small fish on the shore seem to have come. The big fish in the deep sea have happily given it a miss knowing that they will not be touched

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Akand

Oct 3, 2016

Dear Mr vivek kaul,
Your daily write-ups are a great source of analytical information and gives the true picture of things.
I would request you to do a report or enquiry on an news item that I had read last year.
The news item said that more than 61,000 HNI's migrated from India in a period of 14 years till 2014/15. This means more than 61billin USD left India legally. If this is true, then the efforts to bring in FDI is a silly exercise as only recently in the past few years have the cumulative inflows exceeded 61B. Couldn't the govt have encouraged domestic capital instead of making concessions to attract foreign capital?
Regards
Akandcoindia@gmail

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sashikumar

Oct 3, 2016

Black money data will not be shared with any agency-FM, The names big loan defaulters will not be revealed- earlier statement by the former RBI Chief. In our country ordinary citizens who do smaller crimes are punished but unfortunately the state protects people who commit bigger crimes.
In our country one can see individuals who are having 100 times more income than you paying 100 times
less tax than you. Some with very high income do not pay income tax at all. Usually income tax raids
happen only in the premises of opposition party leaders. It is better to abolish income tax and compensate the revenue loss through additional indirect taxes. Income tax causes economic injustice and punishes only those who cannot escape the net. The big and the powerful know how to exploit the loopholes. (recent example is Donald Trump)

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