Alternative to note ban to tackle black money

In countries where there is GST for long, taxpayers have evolved methods for creating shell companies to evade tax

Several economists and critics have said demonetisation has not been a success and, in any case, the same result expected to be achieved by demonetisation could be achieved by other methods. None has discussed clearly what those are. I am including in this discussion the most eloquent and famous ones. Namely, Raghuraman Rajan, Arun Kumar and Kaushik Basu. I am trying to put together the alternatives they suggested directly or indirectly to achieve the same results as demonetisation, from their writings, books and interviews.

Rajan has not written anything on this in his book, I do what I do, which I have read carefully. In interviews with several television channels and newspapers, he has indicated “there were better ways of achieving the same objective, without banning notes outright” (Business Standard, September 9, 2017). He has not indicated those better ways. Elsewhere in a TV interview, he has mentioned over-invoicing by corporates should be stopped to check black money. There are no details. He has also indicated a goods and services tax (GST) would be a good way to check evasion. Kaushik Basu has also said GST would be better than demonetisation. Arun Kumar has written a book on black money and has written quite extensively on demonetisation but not indicated how an alternative could have succeeded better, though he has asserted, “Black money needs to be tackled but demonetisation is not the way.” 

So, these critics are excellent in their inimical interpretation of demonetisation but are not able to give an alternative. I shall deal with GST and over-invoicing, which are specifically named, though not discussed.

The targets of demonetisation were (1) eliminating or reducing black money, (2) removing counterfeit notes, (2) control the funding of terrorism, (4) increasing of electronic transactions and (5) increasing tax compliance by getting more tax payers . The first three were mentioned in the initial period and the last ones later, which the inimical critics called, "changing goalposts". They did not consider that subsidiary effects need not be mentioned at the first instance. 

The target was not to tackle foreign holding of cash siphoned off from India and stashed in tax havens, for which separate action is afoot. The target is also not to tackle black wealth, such as hoarded gold or property bought from black money. Arun Kumar has been constantly trumpeting that demonetisation has not tackled black property. That was not a target. Given these targets, I shall discuss the alternatives, GST and checking of over-valuation. GST has already been introduced and been hailed by Basu and Rajan. Rajan has said in his interview it would check evasion. Actually, GST is no guarantor of checking this. Side by side with GST, cash transactions go on. In places where there is GST for long, such as the European Union, Brazil, South Africa and Canada, taxpayers have evolved methods for creating shell companies to evade tax (Fraud in VAT in EU-VAT Monitor Vol 15, No 3, 2004).

Sukumar Mukhopadhyay

Overvaluation by corporates has been mentioned by Rajan without elaboration. Regarding over-invoicing of import, we must remember nearly 50 per cent of import is of oil and by government undertakings. For the rest, there is a very little scope, as value comparisons are made with comparable prices by the valuation directorate established for this purpose. 

Few cases by some shell companies can be made as a fraud, which is not substantial in quantity. The money is saved abroad, which is not black money in India. Over-invoicing of export in general is not practicable, as Indian goods are not competitive in foreign markets. Even for drawback export, the valuation directorate checks prices. They get caught. Rajan has not discussed the main source of black money, which is direct tax and real estate. So, the suggested alternatives would not achieve any of the five targets mentioned.

The writer is member, Central Board of Excise & Customs (retired)

Email: smukher2000@yahoo.com