With 30 December Approaching, Government Must Be Ready With Demonetisation Endgame

With demonetisation entering its final phase – just about two working weeks to go before the 30 December deadline – the government needs to get its endgame planned clearly. Given the large volume of demonetised Rs 500 and Rs 1,000 notes coming back to banks, the implication is simple: if the government hopes to get black money holders to pay for their misdeeds, it must go after them through the taxman.

If Rs 14 lakh crore of the Rs 15.44 lakh crore outstanding amounts in the demonetised notes come in, it means the value of black money staying out will be small. While some of the balance amounts can be treated as gains to the Reserve Bank of India (RBI) by amending the RBI Act, the amounts won’t be huge enough for the government to claim a bonanza.

As against this gain, there is the revenue loss that seems likely in some sectors in this quarter and the next, as the cash crunch delays consumption.

The four questions that need advance thinking on what to do are the following:

One, how does one go around checking bank accounts for possible evasion of tax, especially those accounts that have not declared incomes under the Pradhan Mantri Garib Kalyan Yojana?

Two, how does one deal with Jan Dhan accounts, which may have been used as benami fronts from the real depositors?

Three, what needs to be done to revive the economy after the demonetisation shock?

Four, what can be the new deadline for the goods and services tax (GST), since some states are playing hardball?

The first two issues are critical, for the chances are lakhs, if not millions, of Indians will probably report bloated deposits. It is neither right nor possible to unleash aggressive tax scrutiny of millions of people for two simple reasons: the tax department simply does not have the staff strength to do so, even assuming it has algorithms that can figure out which transactions may be suspicious. The second reason is that any tax terror will prolong the uncertainty created by demonetisation, with so many people being nervous about what is going to happen to them. Tax terror on such a large scale will invite a huge backlash, for many thousand innocents will surely be caught in the crossfire.

A way out would be to first involve the Supreme Court-monitored Special Investigation Team (SIT) to probe black money. This SIT was a needless encroachment on executive terrain, but this is one time when its supervision of suspicious accounts may be useful to guarantee fairness and credibility. It would also help ward off the court’s unwelcome interventions once more. Any scheme to go after potential tax evaders can be evolved after consulting SIT, and the latter can even be given details of the results.

When it comes to Jan Dhan accounts, the taxman must find logical ways to go after the people behind those accounts, and not the benami poor. The places to look are commonality of employment (some truck fleet operators are supposed to have put their black money into employee accounts and taken post-dated cheques), social and village linkages. One way to go about it is to freeze these accounts, and allow only limited withdrawals for an extended period. Another way would be to automatically cover these sums under the Garib Yojana, assuming the sums vastly exceed taxable limits. What is clear is that the poor should not be harassed. It will be a time-consuming affair.

Then there is the question of large amounts being deposited in other accounts. Many of these may relate to accounts of those in professions where large amounts of transactions take place in cash – doctors, lawyers, traders, chartered accountants, architects, consultants, et al. Those who don’t file returns can be asked to do so compulsorily, and deposit a tax (reclaimable if proven genuine) in advance. This may need law changes, but it’s worth doing as an alternative to visits by the taxman.

The third and fourth points are most important: it is clear that the 1 April GST deadline will be missed. Finance Minister Arun Jaitley must thus target 1 June, since September is anyway the constitutional deadline. He should make concessions to states, as this tax has a huge impact on federal powers. Every month’s delay beyond June will mean a longer time for implementation. With many of those who will be covered under GST already coming into formal systems of payment following demonetisation, it is best to get the GST done quickly to avoid a double disruption.

As for the stimulus required to compensate for the demonetisation-linked slowdown, a few simple steps can help: one is to put money in the Jan Dhan accounts – Rs 5,000-10,000 per account would be ideal. These will be quickly consumed. A quick financial literacy guide for those with zero balance will be useful. The centre should fund this exercise, and not depend on banks to carry the can. They are already the worst hit by the demonetisation exercise.

Then, both individual and corporate taxes can be cut in the budget due on 1 February. A three-month excise rebate for many sectors hit hard by demonetisation would also be worthwhile.

The time to start planning for the post-30 December phase is now.