Jaimini Bhagwati: The unbiased are waiting

Demonetisation could potentially be a mega and lasting game-changer. Plus, if Budget announcements on funding for political parties are remedied, faster progress could be made towards a more equitable and prosperous India. 

First let us focus on the number of cash deposits in bank accounts between 8 November and 31 December 2016. According to the Budget speech on 1 February 2017: (a) Cash deposits, made by companies and individuals, in 10.9 million bank accounts were between Rs 2 lakh and Rs 80 lakh and Rs 5 lakh on an average; (b) in another 14.8 million accounts similar deposits were above Rs 80 lakh each and the average was Rs 3.3 crore. Did individuals or companies need to retain such large amounts in cash for business or personal purposes? 

As of January 2017, around 270 million PAN cards had been issued.  By contrast, only about 27 million personal tax returns with incomes above Rs 2.5 lakh per annum were filed last year. Jewellers, professionals and others have deposited large amounts which are inconsistent with their reported taxable income in the recent past years. 

Consequently, for purposes of transparency, the government needs to bring out a detailed White Paper on amounts deposited after demonetisation. Taxes paid by those who have deposited large amounts need particular attention. It seems that separate deposits have been made in accounts in several banks in multiple locations but with the same PAN number. Notices should go out in cases which do not meet the smell test of huge discrepancies between amounts deposited after 8 November and taxes paid in earlier years. Concurrently, every effort has to be made to prevent tax officials from harassing those who have legitimate business or personal reasons for maintaining large balances in cash. A White Paper should make it difficult for tax and government officials to extort from or connive with tax evaders. And, this Paper should be presented to Parliament at the beginning of the monsoon session. 

As for cash transactions, why allow these up to Rs 3 lakh as suggested by the government? Does anybody other than those who have unaccounted wealth buy or sell anything for Rs 3 lakh in cash? In smaller enterprises, cash may be needed to pay workers who do not have bank accounts. However, a time frame should be set within which this amount of Rs 3 lakh is whittled down to Rs 50,000. The Budget speech mentioned that Aadhaar Pay, a merchant version of the Aadhaar-enabled payment system, is to be made operational soon. This and other digital payment modes which exist or are being put in place should reduce the need for large cash transactions. 

In the coming months there will be uncertainties related to the implementation of the goods and services tax (GST). Further, bank credit growth will continue to be tepid what with the huge debt defaults by large corporates and corresponding non-performing loans on the books of public sector banks. Even with these reasons for being cautious, contrary to what was announced in the Budget, the government should not allow cash donations of even up to Rs 2,000 to political parties. The government’s logic is that the Election Commission had suggested a lowering of cash donations from Rs 20,000 to Rs 2,000. As many, including this newspaper in an editorial, have pointed out anonymity for donations up to Rs 2,000 in cash just means a little more effort in fabricating spurious lists of millions of party supporters who have each contributed Rs 2,000 or less in cash. There is no credible need for allowing donations up to Rs 2,000 in cash. 

The Budget, paragraphs 164 and 165 under “Transparency in Electoral Funding”, intends to allow anonymous bonds for political donations. These bearer bonds are to be issued by banks after an enabling amendment of the Reserve Bank of India Act. The reasoning is that “donors have also expressed reluctance in donating by cheque or other transparent methods as it would disclose their identity and entail adverse consequences”. It is illogical that donors should feel that if their identity is known this would “entail adverse consequences” for them. Adverse consequences would be caused by whom and how? The government seems to be overly concerned about the need for corporates to keep donations to one political party secret from other political parties. 

If there is no possibility of bearer bonds being used to avoid taxes would government extend the use of such bonds for individual/corporate payments to each other? How would banks ensure that bearer bonds would be issued only for credit to the accounts of political parties? How would government prevent “shell” political parties from misusing their bank accounts for bearer bonds to be deposited? To evade detection, after bearer bonds are deposited in a political party’s account, demand drafts could be issued in smaller amounts and credited into multiple individual accounts. 

The permutations and combinations of processes that could be used to confuse matters are just too numerous. It would be near impossible for forensic efforts to track the money trail from bond issuance to final beneficiaries. If disputes arise between government/tax-authorities and corporates/political parties/individuals about bearer bonds such cases are likely to drag on in our courts for decades. 

It is also high time that all tax exemptions for political donations are eliminated. As we know, more than 50 per cent of registered political parties have never contested elections and probably exist only to launder unaccounted wealth. Unless all parties which show no political activity of any sort are derecognised and similar parties are never allowed to come into existence in the future how would government prevent them from receiving tax-free “donations” in the form of bearer bonds? 

Demonetisation could be a game changer but credible follow-up steps need to be taken to assess consistency of deposits with taxes paid and to outlaw all anonymous, tax exempt political funding. To sum up, the unbiased are waiting patiently after their demonetisation travails for the dividends of probity in the funding of political parties and wider tax compliance.

The author is the RBI chair professor in ICRIER j.bhagwati@gmail.com