After the decision to demonetise Rs 500 and Rs 1000 notes on November 8, people with hard cash rushed to banks to deposit the money before the high-value currency notes actually became worthless pieces of paper and the banking system saw an unprecedented flow of deposits. Apparently, the government move was to unlock the black money from its holders and bring it into the formal system so that there is a level playing field for the government and the poor vis-a-vis those who had huge sums of clandestine money, mostly in cash, and ran a parallel economy. The sudden announcement of demonetisation and the relatively short window provided to get rid of the defunct currency notes hit the black money holders where it hurts the most; they had no option but to take the money to the bank, where the sources of the money will be scrutinised and applicable taxes will be levied. In the ensuing din, there were reports that black money hoarders are parking their money in Jan Dhan accounts and so on. The government having taken such a political risk by demonetising the high-value currency notes was sure to hit back with stringent income tax laws to address the problem of unaccounted money.
On Monday, Finance Minister Arun Jaitley tabled the Income Tax Amendment Bill in Lok Sabha, which proposed 30 per cent tax on undisclosed income plus 10 per cent penalty beside a 33 per cent surcharge (on the 30 per cent tax), adding up to approximately 50 per cent in tax on unaccounted deposits. For the purpose, the government has proposed a scheme called Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016 (PMGKY). Those who declare their money under this regime will be required to pay tax, penalty and the surcharge, called ‘Pradhan Mantri Garib Kalyan Cess’. In addition, they will have to deposit 25 per cent of the undisclosed income in a Deposit Scheme to be notified by the RBI under the ‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’. This amount will be utilised for different schemes meant for the poor such as irrigation, housing, toilets, infrastructure, primary education, primary health, livelihood, etc., so that there is justice and equality.
The Income Tax Amendment Bill 2016 presented in Lok Sabha on Monday is an immediate measure to address the problem of unaccounted money entering the formal system and how it can be made into clean money. This is a macro level response to the problem arising out of the demonetisation move. However, this does not solve the more burning issue of the day and that is lack of liquidity in the market due to calling back of Rs 500 and Rs 1000 currency notes. Economic development of a nation of the size and population that India has depends on intensification of economic activities at the grassroots level. Ensuring that there is enough liquidity available for economic activities to intensify and create and sustain livelihood at the grassroots level is of paramount importance in policy planning. The Income Tax Amendment Bill 2016 is certainly not a measure in that direction. At best, it can be used by BJP leaders in their rhetoric against black money.
The ideas that the BJP leaders have been so far put forward to solve the problem of shortage of cash across the country, which hurts economic activities at the grassroots level and the informal sector where majority of the people find employment, are mere hogwash. Technology-based transactions such as online, payments through debit/credit cards or mobile phones will take ages for the common man to understand and adopt. And until that happens, they have a highly hostile environment to deal with in order to earn their livelihood, run their businesses, and dream to break economic barriers and succeed.