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Anti-black money initiative could mean a policy reform bigger than GST

It was as far back as 1990 when I coined the phrase “bis-mil-muflis” (with help from my good friend Saeed Naqvi) to characterise the attitude of the government and left intellectuals towards policy formation and execution. (‘Bis-mil-muflis — And why anti-market policies hurt the poor,’ Sunday 7-13 January, 1990). Not much has changed in the last 26 years — a period in which absolute poverty has fallen from 60 per cent to less than 10 per cent (Tendulkar poverty line). The recent anti-corruption, anti-black money drive of the BJP is being characterised by the same intellectually old people as being against the interests of the poor.

Just think about what these politicians, “intellectuals” and TV anchors are saying — the poor are going to be hurt by the confiscation of the Rs 500 and Rs 1,000 notes. AAP and Arvind Kejriwal: “Real culprits who have stashed black money are sitting tight while lives of farmers, small shopkeepers and housewives have been thrown in utter chaos”. Rahul Gandhi: “Once again Mr Modi shows how little he cares about ordinary people of this country — farmers, small shopkeepers, housewives”. Mayawati: “Poor people, middle-class citizens, small businesses and farmers have been hit the most and not the people who have black money”. Note how frequently the farmers (who are not taxed) and the poor (who have no black money) are mentioned in the (old) politician’s fight against black money.

The table reports several relevant statistics for the current “bis-mil muflis” debate. First, the poor, according to the Tendulkar poverty line, today are close to seven per cent of the population (say, a 100 million people). The new policy states that each bank holder can only withdraw cash equivalent to Rs 20,000 a week. It is a nice coincidence that there are 4.5 weeks in a month and the average family size in 2011/12 was 4.4. Assume there is only one bank account holder per family. Two estimates of consumption are reported for 2011-12 and 2016. The first is the NSS estimate based on a household survey; the second is the national accounts estimate by the CSO (part of GDP accounts). In 2011/12, the NSS consumption was only 50 per cent of actual consumption. Both figures are provided but the discussion about the impact of policy is based on the more accurate national accounts estimates. Just look at the consumption level for the 99th percentile — Rs 13,910 per person per month. But each person is allowed a cash withdrawal of Rs 20,000 a month. There is no law that says that you should not use credit cards or cheques for consumption. The policy of a maximum of Rs 20,000 cash withdrawal is to be reviewed by the RBI on November 24 — let us hope the limit is not increased; the Rs 20,000 a week limit should stay. Actually, the data in the table suggests that this cash limit should be reduced.

There should be no question that this BJP policy is bold and courageous. The trading community has long been identified as the BJP’s core constituency and Prime Minister Narendra Modi has gone against this powerful support group. So let us give Modi a considerable amount of credit for taking a bold step for the country — genuinely in the name of the nation. Let us also recognise that there is a positive political fallout for the BJP. Five state elections are due next year. It is alleged that opposition parties like the Congress, BSP and Samajwadi Party have historically relied on greater amounts of black money than the BJP. It is just a rumour, but is quite likely a correct one. Thus, the political positives may more than balance the negative.

The fight against corruption and black money in India has just begun. If successful, this will go down as the biggest reform in India, bigger than the GST (though the two are related) and bigger than the industrial policy reform of 1991. But, and there is a but, while the policy is very effective in its attack on past black money, it is silent on the creation of money.

First, let us identify what is black money, and its determinants. Money is money income earned for which tax is not paid. This black money generation is not due to corporates or due to salaried individuals (both sets are in the tax net). Most of the generation of black money is on the part of professionals (for example, accountants, doctors, lawyers) — the missing middle identified in the Vijay L. Kelkar Report of the Task Force on Direct Taxes, 2002.

Most of the spending of this black money is for expenditures on gold, purchase of foreign exchange, and purchase of real estate. Transfer of money abroad into “anonymous” accounts is now a difficult exercise for all the world’s black money residents. Gold purchases and hoarding are also becoming more difficult. So the prime outlet for big-time black money use is real estate.

If a salaried professional buys a house, and pays part of the purchase price in cash, she has inadvertently converted her own white money into black money for the seller.

The policy conclusion for the Modi government is obvious. First, reduce income tax rates so that the incentive to avoid taxes (on the part of the not fully compliant middle) is reduced. No amount of punishment disincentive is as potent as a monetary incentive. Second, decrease the onerous and prohibitive tax rates on purchases of houses. With the GST, there should be no such thing as a stamp duty on land at any of the stages of “sale”. That is a relic of colonial rule, and that of the Congress, and should have no place in a GST India.

Third, reduce the capital gains tax on property to less than 10 per cent, if not zero. Just note how much tax revenue the government collected from long-term capital gains (on houses, stocks, etc) in 2013-14. A net amount of Rs 8,000 crore (a long-term tax of Rs 65,000 crore versus loss set-off of Rs 57,000 crore) from total direct tax revenue of Rs 600,000 crore. That is less than 1.2 per cent.

I have often claimed (the Kelkar report of 2002 and the 2012 report concur) that morality has no place in taxation — and efficient, and legal revenue generation has all the place. Far too often the in-the-name-of-the-poor advocates have held the economy, and the aam aurat, hostage to their “moral” recommendations (often combined with whiskey). This must end, and Modi must do that with large-scale tax reform. And when the BJP does that, time to attack that other holy cow relic — no taxation of agricultural incomes. The new beginning has begun — time now to complete the journey.

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