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What the Media Did Not Tell You About the Black Money Scheme Part 2

Oct 4, 2016

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Note: This piece is similar to the one I wrote yesterday. It's just a much better way of expressing the same thing. Ideally, this is the piece I should have written yesterday. But sometimes one does end up taking a longer route to arrive at the same destination.

Human beings have a habit of looking at absolute values and ignoring the denominator. Economists refer to this tendency as the denominator neglect.

The denominator neglect has been at full show in case of the Income Declaration Scheme which came to a close on September 30, 2016. The scheme had been in operation since June 1,2016. It offered people who had black money within the country to declare it to the government, pay a tax of 45 per cent on it and become a part of the system.

Black money or unaccounted or hidden wealth, is essentially income that has been earned over the years, but on which taxes have not been paid.

The government of India got declarations of Rs 65,250 crore of black money under the scheme This money will be taxed at the rate of 45 per cent. It means collections of Rs 29,362 crore for the government.

The scheme has been declared to be a huge success by the government as well as the media. The government press release announcing the black money declarations said that there has been "a tremendous response from the general public, especially in the last two months".



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The media led by The Times of India went to town saying that the collections had been three times bigger than the collections of the Voluntary Disclosure of Income Scheme (VDIS) of 1997, the last black money declaration scheme that the government had launched.

The total amount of black money declared in VDIS 1997 had stood at Rs 33,000 crore. The corporates had to pay a tax of 35 per cent on the black money declared whereas others (primarily individuals) had to pay a tax of 30 per cent. This led to a collection of around Rs 10,000 crore for the government.

The collections in the Income Declaration Scheme of 2016 are expected to be Rs29,362 crore or around Rs 30,000 crore. This is three times bigger than the 1997 number or so the media seems to have concluded.

The trouble is this is wrong. What the media hasn't taken into account is the denominator or the size of the Indian economy, which has grown significantly bigger in the last two decades. The nominal gross domestic product (GDP) at current prices, a measure of the size of the economy, in 1996-1997 (the financial year before the VDIS 1997 scheme) was Rs 13.02 lakh crore. The total tax collected by the government in VDIS 1997 amounted to around Rs 10,000 crore. This was 0.77 per cent of the GDP.

The nominal GDP at current prices in 2015-2016 (the financial year before the Income Declaration Scheme of 2016) was Rs 135.76 lakh crore. This is 10.4 times more than the GDP in 1996-1997. Hence, the size of the economy is 10.4 times bigger, though the tax collected has grown only three times.

The tax the government expects to collect from the Income Declaration Scheme of 2016, is Rs 29,362 crore. This amounts to 0.22 per cent of the 2015-2016 GDP.

This is significantly lower than the tax collected in VDIS 1997. The media obviously did not take the size of the Indian economy into account before going to town about the success of the scheme. The denominator neglect was at play.

One reason for lower collections in the 2016 scheme lies in the fact that the rate of tax to be paid is 45 per cent. In the VDIS of 1997, it was 30 per cent or 35 per cent. Of course, more people are likely to declare black money at a lower rate of tax. But even after taking this into account, the difference between 0.77 per cent of the GDP and 0.22 per cent of the GDP, is fairly significant.

In fact, if the idea was to ignore the size of the Indian economy, then the media could have come up with an even better result. Instead of taking the VDIS of 1997 and saying that the tax collected in the Income Declaration Scheme of 2016, will be three times bigger, it could have taken the Voluntary Disclosure Scheme of 1975.

The total black money disclosure in case of this scheme was Rs 738 crore and the total tax collected stood at Rs 241 crore. The total tax expected to be collected under the Income Declaration Scheme of 2016 is Rs 29,362 crore, which is 122 times bigger.

The point being that even though the government has managed to collect some reasonable amount of tax under the Income Declaration Scheme of 2016, it is nowhere as significant as it is being made out to be.

Postscript: The Business Standard reports only 15% of black money declarants came in on their own. If the remaining 85% were forced to declare black money, why is there the need for amnesty schemes like the Income Declaration Scheme?

This also tells us that the IT department knows who the black money wallahs are. Business Standard reports that the IT department sent letters to 7 lakh possible evaders asking them to avail of the Income Disclosure Scheme. Why is there a need for amnesty schemes to do something like this? Why can't such things be done during the normal course of things? Of course, this is benefit of hindsight. But there are lessons to be learnt here.

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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7 Responses to "What the Media Did Not Tell You About the Black Money Scheme Part 2"

Indrakant Sulibhavi

Oct 9, 2016

Sir you have rightly emphasised on the need for using appropriate denominator to arrive at valid conclusions. There is no meaning in comparing the number of suicides in UP with the number of suicides in Haryana. Total population of respective States must be used as denominator. In the present case, it should be total amount of black money(strictly speaking it should be called black income)in the economy during the respective years.In the absence of requuired data, some proxies have to be used.Generally black income is spent on luxuries like staying in five-star hotels and travelling by airlines in business class on non-government account. These may be taken as proxies for black income.

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S.Rangarajan

Oct 4, 2016

1. While I congratulate and admire Mr. Vivek Kaul for his truthfulness, honesty and ability to call a spade A SPADE, I am a little worried that one day he might rub the evil elements on the wrong side. 2. As far as Indan electronic and print media are concerned, less said the better. There may be a few Vivek Kauls but I am yet to find another Vivek Kaul. By the by, I am 71 years old.

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Amit

Oct 4, 2016

Dear Vivek,

I pointed this out earlier also and note this now as well that your comments are more of crticising the Government. May we know the reason? Please dont revert by saying that your comments are genral and not against anyone in particular. Can you also share some articles where you criticised UPA Government? Would love to read that

@Equitymaster owners : What is this going on ????

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Nitin Raheja

Oct 4, 2016

Vivek one of the factors that need to be borne in mind while making comparisons is also the size of the black economy relative to the official GDP figures, i would presume through the years with better compliance that as a % of official GDP would have also come down, hence the disclosures as a % black money would make more sense. Unfortunately we would not have any figures on that number.

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Rajeev Nayan Ghuwalewala

Oct 4, 2016

As a matter of fact, business and industry hardly have money, not to talk of black or white. Most of them are living in turmoil under heavy debt & statutory burden. It won't be an exaggeration if I say, many of the 85% who were forcefully made to declare would borrow money for payment of Tax.Businessman is under the fault finding lenses of Tax men and when you are after somebody it's not impossible to locate fault caused due to reasons beyond their own control. Why no politician, bureaucrat, Police men, media personnel, lawyer were issued notices or raided under section 133A of Income Tax and forced to declare undisclosed income. Don't they have undisclosed income.

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Chandrakant Modi

Oct 4, 2016

Hi,
You should also analyze class of IDS people. Are there any big builders, any political leaders, any political party, any Government Officer, any Government contractor, any corporate industrialist or any CEO/CFO kind of person??? I think you would not find any!!

On average less than 1.2Cr disclosed by 64000 businessmen like Dhosawala, caterers, event organizers, doctors etc. that too out of fear!!

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Yegneshwar

Oct 4, 2016

This is like begging for your money that the other person has borrowed and not returned. If the IT guys know the defaulters, then they should ask the full tax they they are liable to pay including the fines, penalty etc.

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