Don’t miss the latest developments in business and finance.

The NDA govt's war against black money a mixed bag in terms of results

Cash hasn't vanished but overall, the exchequer is richer

black money
Illustration by Binay Sinha
Shrimi Choudhary New Delhi
5 min read Last Updated : Mar 27 2019 | 11:49 PM IST
Eradicating black money was one of the key planks of the Narendra Modi-led Bharatiya Janata Party (BJP) in the run-up to the 2014 general elections. While campaigning, Modi promised to bring back the black money stashed abroad and deposit Rs 15 lakh in each citizen’s bank account. Five years later, the battle against the cash economy is still being waged.  

As the country prepares for the 17th Lok Sabha election, Business Standard examines the effectiveness of the National Democratic Alliance (NDA) government’s efforts to wipe out black money.  

On the day it came to power, the Modi government appointed a Special Investigation Team (SIT) on black money. The SIT has come out with six reports suggesting measures to curb the menace.

One of its main recommendations on the treatment of participatory notes was implemented by the market regulator, the Securities and Exchange Board of India (Sebi) in 2017. In its 2018 Budget, based on an SIT proposal, the government withdrew the exemption of tax on long-term capital gains on equity investments. The move was triggered by manipulation in stock prices by dealings in shell company shares. 

Earlier, the government enacted the 2015 Black Money Act which provided taxpayers with a  one-time compliance option between July and September 2015 to disclose any illicit money stashed abroad. Around 650 individuals disclosed income to the tune of Rs 4,100 crore held in tax havens abroad. 
 
“With the enactment of the Black Money (Undisclosed Foreign Income and Assets) Act, the Imposition of Tax Act, 2015 and the Benami Transactions (Prohibition) Act of 1988, black money hoarders have been significantly hit,” said Amit Maheshwari, Partner at Ashok Maheshwary and Associates. 

However, critics argued that the steep penalty that came along with the scheme led to a lacklustre response. In addition, fear that the information would not be kept confidential contributed to the muted response by companies and individuals. 

The government followed this up with an Income Declaration Scheme which invited people, once again, to come clean on their illicit gains. Between June-September 2016, a total of 64,275 people disclosed a princely sum of Rs 65,250 crore. 

Then came demonetisation on November 8, 2016 when high denomination notes of Rs 500 and Rs 1000 were withdrawn overnight from circulation. It was believed that Rs 3 trillion of the currency in circulation held in high denomination notes — deemed to be black money — would not come back to the banks. 

The move, aimed at tracking down the corrupt, attracted widespread criticism for causing hardships to ordinary Indians and unleashing chaos, only to find the Reserve Bank of India (RBI) confirming at the end of it all that almost all the cash had returned into the system.  

“An important but controversial step has been demonetisation which, even though it resulted in the entire money coming back to the system, nevertheless armed the tax authorities with an audit trail and enough data to deploy data analytics to catch the conversion of black money,” said Maheshwari.  

He added that data analytics was being deployed effectively. “It has resulted in suspicious transactions being caught. On top of this, exchange of information with low tax jurisdictions like Switzerland has also resulted in an outflow/reduction in suspected untaxed money held in such jurisdictions.”  


Demonetisation spurred the use of digital payment through electronic mediums such as e-wallets. 
 
There was a multi-fold jump in digital payments during this period. Real estate prices dropped as cash became scarce.  

During this period, the government provided another option to disclose illicit gains via the Pradhan Mantri Garib Kalyan Yojana (PMGKY). Under this scheme, which ran from January to March 2017, the response was muted with only Rs 6,000 crore declared. This was taxed at 50 per cent with a rider that an additional 25 per cent was to be invested in government bonds for four years. The additional investment was to be refunded without any interest. 

Other decisions such as amending the Benami Transaction Act and making it more stringent turned out to be effective, especially when dealing with fraud cases which involved shell companies. 

In addition, the launch of Operation Clean Money soon after the note ban resulted in the further admission of over Rs 15,000 crore as undisclosed income. Another Rs 13,000 crore or so was seized post demonetisation. 

The income tax department saw an increase of close to 30 per cent in returns during 2016-17 while the government was able to deregister roughly two lakh shell firms involved in illegal activities.  

Around the same time, the Modi government implemented the biggest-ever tax reform in the country’s history, paving the way for a uniform tax regime. The goods and services tax (GST), rolled out to replace an intricate indirect tax system structure, increased the indirect tax base and made traders and businessmen more accountable. The GST system was designed to discourage tax evasion and has since been simplified to make compliance easier. 

In addition to these measures, investigations into foreign disclosure cases such as the British Virgin Island, the Panama Paper leaks, and Paradise are also likely to see greater scrutiny of black money held abroad. Further, measures such as the Place of Effective Management (PoEM) and the General Anti-Avoidance Rule (GAAR) are also likely to go a long way in curbing tax avoidance.
Next Story