Carrot and stick

The tabling of the Taxation Laws (Second Amendment) Bill marks an intensified phase in the crackdown on black money. It stems from the realisation that black money hoarders (in cash) could use loopholes in the Income Tax Act to negate the demonetisation exercise. The Bill offers another amnesty scheme, the Pradhan Mantri Garib Kalyan Yojana, on the heels of the Income Declaration Scheme that ended on September 30 and unearthed a modest ₹70,000 crore. The PMGKY, the proceeds of which will be used to push social welfare, is expected to come into effect at the earliest,following the passage of the Bill and the President’s assent. Under this, those who own up to untaxed money can get away by paying 50 per cent tax, deposit 25 per cent of the rest with a bank for four years and keep the balance. Others who prefer to wait for the taxman’s knock may end up paying a punishing 82.5 per cent levy. Seen along with announcements that the Centre will come up with further steps, possibly to address unaccounted wealth in other forms, it is clear that we are seeing a determined assault on black money — of which demonetisation marks just the beginning. Demonetisation has certainly unleashed large-scale economic disruption; but it is equally true that dealing with tax evasion, which has become a way of life, calls for some stern measures. The fact that barely two crore individuals pay income tax in a country of over 120 crore individuals explains why our tax-to-GDP ratio is stuck at about 10 per cent, impeding development and welfare efforts. The influx of over ₹8 lakh crore into banks since November 8 will significantly improve the tax database — a process that had been set into motion earlier with the use of PAN for high-value transactions.

However, amnesty schemes have common limitations. In the case of the PMGKY, an admission to unaccounted money can lead not just to a 50 per cent income tax levy, but also open up excise claims, thereby deterring an entrepreneur from coming clean. In fact, the total levy may exceed 82.5 per cent, which he might have to pay when the taxman seeks him out. This perhaps explains why the IDS, despite a ‘confidentiality’ clause thrown in, did not rake in very much. The new Bill seems to vest tax authorities with a disturbing degree of discretionary power — to peg the level of levy and interrogate the assessee.

In trying to rid the economy of black money, the Centre should not lose sight of its original promise of doing away with ‘tax terrorism’. It should devise a standard operating procedure for the tax authorities to rule out harassment. Thursday’s steps, enquiring into gold in the possession of individuals, seem intrusive, if not vaguely reminiscent of the Indira Gandhi years. The Centre needs to step back from knee-jerk responses, and instead focus on creating an enabling climate for the bonafide entrepreneur and individual.

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