Possible Steps for Demonetization to Succeed

by Amit Bhushan on Sunday 13 November 2016, 5:26 PM | Category: Strategy| View: 716 views
Possible Steps for Demonetization to Succeed By: Amit Bhushan Date: 13th Nov. 2016With considerable resolve on display regards Demonetization drive and a gargantuan size of public having already being catered to by the banks, the government perhaps is not having any other option but to make the drive succeed. What seems lacking is any thoughts around parameters to make the drive a success. If government is expecting some unearthing of black money, its quantum is not yet quantified in public imagination which gives an image that risk is being hedged rather than a full blown war being waged even with the exercise of this magnitude. If the deposits in bank is expected to be shored up, then we still do not have any idea what peak would the bank deposits hit in the overall banking sector and where would they stabilize. There is a lack of conservative estimates as well as the optimistic estimate. This is even as rise in deposits in banking sector being directly encouraged as a result of the policy decision. Then we need to be sure that there is overall retention of these deposits rather than the new notes slipping away as withdrawal from the banks, and so there should be increased average deposit and lesser currency in market. For such a scenario, a rise in electronic transaction might be needed and this requires the neighbourhood stores to adopt wallet and cards processing in a big way. Many of these store haven't taken up these tools because of fear of inspector raj or perceived increase in tax outflows. While this may be on account of perceived income tax related issues for the entrepreneur, however the other part is because quite a few small manufacturer have similar issues and avoid tax compliance. This then creates additional pressures as shop keepers are paying such people in cash and not raising bills/invoices for any goods to public (due to better competitive perceptions). Besides the need of the shop keeper to be competitive in the market, it often forces others to follow suit as the tax is a cost on business which also enhances so other costs of maintaining record. Actual culprit may be just the manufacturer/s who may have induced corruption in the system and several such people abound in the system. Then of course the whole industry spans up including Real estate etc. where such money plays a vital role. The political class joins in bringing illegal mining, building bye laws and CLU related twist, land grab mafia etc. amongst a host of alternate ailments including gold.What the Indian government has always attempted, is that the small guy i.e. entrepreneurs with turnover less than four million rupees can avoid record keeping and can also manage with just a small income tax. After paying these taxes such businesses can consider themselves to be compliant. The others have to ensure proper book keeping and pay taxes, file return etc. Similarly, those individual with low income can file Forms like 15G or 15H to claim lack of income to avoid paying taxes on interest. While those having higher income and declaring them, have to give proper account for interest income as well. However there participation in overall system in not restricted although there is a transaction level limit of fifty thousand for each transaction. In other words there are negative incentives for compliance with taxation while adequate incentives for those camouflage income information effectively. If the government can do more to creating positive incentive for those paying taxes and filing returns as against those not filing returns, the situation can be turned around. What can be done is that those filing returns with PAN information against their deposits/debentures/demat accounts/share certificate, can possibly do away with Tax deducted at source and those not giving PAN info. or paying taxes, requiring to claim back the tax deducted at source may be on a quarterly basis would change the compliance level or making Aadhar enabled check mandatory for all such investments and filings of 15G or 15H. Such people should be allowed to file claims for deducted taxes by declaring a lack of income form which needs to be approved for the past quarter before the next quarter's payment can be released by the bank. Similarly the reverse incentives (built into our processes) for businesses paying taxes needs to be reduced, which can be in the form of such businesses making deductions against voucher purchases (cash purchases) of goods and services and depositing the tax on same on quarterly basis, in case a GST/VAT paid invoice is not available from supplier. Those not filing returns or filing assumed returns (for which there could be separate identification within TAN/PAN) could negatively incentivized, thus. The GST with center's handle on much of overall taxation should be a great support as political interference from states is reduced. In fact with the above steps, the government may allow much freer withdrawal from accounts and announce withholding of exchange of the old currency notes from say 30th Nov. This would only encourage deposits in the banking system. That the good part of Indian politics which works on the premise that each leader would only indulge in shadow boxing rather than hard questioning. This allows for a camouflage for the leaders to almost always remain in business, whatsoever be the delivery. What this also allows for, is that there are always loophole for people to slip through and generally such loopholes exist on account of the poor incentivizing quite a few rich to slip through such mechanisms. While the record keeping and tax compliance/return fling for those with little transactions might be required to be made simple. But those with larger money tracks and mis-declaring by camouflaging/under reporting transactions should be needed to be made complicated. Use of Aadhar mechanism might be an option to cleanse system in say 3-5 years as it would create pressures on compliance. Already there is improved digitization in capital markets, post offices & banks and Corporate FDs, NBFCs needs to be further improved. Some of the instruments may not be made available for those who are non-compliant and these would also ensure that such people are not taken for a ride. These could be instruments offered by corporates like FDs/Bonds and Chit-funds/NBFC deposits etc. Such systemic measures to improve compliance would ensure greater push for transparency and halt negative incentives built in the system whereby tax-paying people are almost forced to get into Cash economy which suits those with black money. A simultaneous push for digital transactions basis wallets/cards needs to be pushed basis suitable incentives.
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