Finance Minister Arun Jaitley, in his reply to the discussion on the Finance Bill , has pointed again to the small direct tax base. Detailed tax data for 2012-13 showed that the picture has changed little from the 1990s, when only 1% of Indians were in the direct tax net.
Mr. Jaitley has presented data on the large sums of money deposited into some bank accounts post the demonetisation of November 8, 2016. The implication is that these may be black funds and they are being tracked and the people behind them will be caught.
The secretary of the Income Tax Gazetted Officers Association has written to the Central Board of Direct Taxes Chairperson that the top leadership has issued directions, at times hourly, leading to confusion and indecision and to spoiling the image of the tax department. Officers have exerted pressure on taxpayers via email, SMS and summons. In spite of all this, apparently little black income has been declared.
Decoding account deposits
In the Budget speech, the Finance Minister stated , “Deposits of more than ₹80 lakh were made in 1.48 lakh accounts with average deposit size of ₹3.31 crore… deposits between ₹2 lakh and ₹80 lakh were made in about 1.09 crore accounts with an average deposit size of ₹5.03 lakh.” These two add up to about ₹10 lakh crore. Thus, two-third of the total of ₹15 lakh crore of old notes returned to the banks were accounted for by 1.1 crore accounts. Even if one or two lakh crores of this sum proves to be black (after years of litigation, etc.), this would hardly dent the black economy generating ₹93 lakh crore in 2016.
Many businesses such as petrol stations and hospitals generate a lot of daily cash. They were allowed to use old currency notes; every day, they would have deposited lakhs of rupees, and over a month, crores.
Businesses hold working capital and cash in hand which, depending on the size of the business, could be substantial. Mr. Jaitley has stated that there are “5.6 crore informal sector individual enterprises and firms doing small business”. Such small businesses work mostly in cash and, therefore, may hold fairly large sums of it. He has also said that there are 13.94 lakh registered companies as of March 31, 2014. Of these, 5.97 lakh filed tax returns but 2.76 lakh of them showed a loss or zero income.
Companies not filing returns or running at a loss or at zero profit also hold cash — to hire labour, buy inputs, spend on overheads. The number of businesses mentioned by the Finance Minister and the crores of farmers together could legitimately hold about ₹9 lakh crore of cash in hand. The remaining ₹8.5 lakh crore of currency in circulation in October 2016 would have been with households.
All cash isn’t black
The government has said it would use ‘data mining ’ to figure out whether the large deposits in accounts are consistent with their declared incomes. This will be a difficult exercise at best. Cash as working capital has to be distinguished from cash as saving from income. Every household keeps some money for day-to-day requirements and for emergencies. The 26 crore Indian households could hold about ₹5.5 lakh crore for these purposes. The balance of the currency in circulation, another ₹3 lakh crore, could be held as black savings. Since about four crore people generate substantial black incomes, the average cash holding of this group would be ₹75,000. Not a huge sum of money.
This is not to say that some individuals may not hold large sums of cash which may be black. It is generally believed that lakhs of people have sacks full of currency at home or on their business premises. Suppose one lakh entities hold ₹20 crore as black cash; that would amount to ₹20 lakh crore which is more than the currency in circulation (₹17.5 lakh crore) in October 2016. It is very likely that not even 10,000 entities would have an average of ₹20 crore in cash.
The notion that black means holding cash is not generally correct and may be true only for a few.
The Finance Minister pointed to the narrow direct tax base by saying that the number of people declaring income of above ₹50 lakh is only 1.72 lakh. He contrasted this with the 1.25 crore cars bought in the last five years. He said, “The predominance of cash in the economy makes it possible for the people to evade their taxes.”
Again, black has been equated with cash. The lacuna is that the above tax data do not give the actual income but the income declared for tax purposes. Given the large number of concessions and deductions available, actual incomes are much greater than the taxable income. So, many more can legitimately afford to buy cars. Further, clarity is needed as to how many cars bought were commercial or by the wealthy. More importantly, if the department could not catch them during normal times then in these days of heavy pressure of work, is it possible? The Income Tax Department is barely able to audit 1% of those in the tax net.
The money deposited in the banks cannot be assumed to be black — the Income Tax Department has to prove that. The explanation given by the suspects would have to be scrutinised. Most of those who deposited more than ₹2.5 lakh would have known that they could be asked questions since the government had already announced that. So, care would have been exercised in depositing the sums, such as showing it on the books as cash in hand and working capital or using shell companies.
In brief, the data given by the Finance Minister in the Budget speech does not imply that demonetisation will help unearth substantial black incomes, because cash deposited does not automatically make it black and black cash is a tiny part of the black economy.
Arun Kumar is a retired professor of economics, Jawaharlal Nehru University .
