SEPTEMBER 16, 2011

By Pramod Kumar Rai, Advocate

NO agency can stop generation of black money as such. However if systematic changes are made which forces people to stay away from black money, definitely black money will go down. Therefore I suggest following two most important systemic changes which will reduce generation of black money without any kind of extra expenditure from the government.

Discouraging Cash Transactions by removing higher demonization currency notes: Why is the incidence of black economy much less and tax compliance much better in developed economies? It is because they have developed better systems. In India the tax compliance is very poor and the size of the black economy is very large. One of the reasons is the predominance of cash transactions. If some policy changes are made so that cash transactions becomes infeasible, then people will be forced to use banking channels, cheques, credit cards etc. Once banking channels are used, the system will have records of income and expenditure, and the black economy would get minimized automatically in due course of time. Further, the universal identification number associated with persons will help in correlating their all financial transactions. One way of achieving this target is to remove the currency of higher denominations from the circulation. If only currencies of lower denomination are in circulation, it will be extremely difficult to have large transaction by cash. Poor people, who have low income, will be able to transact with the currency of lower denominations because they do not have to engage in large transactions. The maximum evasion of taxes is by extremely rich people who indulge in large transactions. This will increase the government tax revenue apart from reducing the black money from the world and bringing peace in the society.

At present in India, currency notes of denominations of Rs 1000 are in circulation, which is a very big amount where average monthly income is less than Rs 5000/-. Ten million rupees (equivalent to more than USD 200000) can be carried in a small suitcase. People are making unrecorded cash transactions of millions of dollars/rupees.

If all currencies of denomination of more than Rs 50 in India are withdrawn from circulation, huge cash transactions will become infeasible and people will be forced to use banking channels. With Rs 50 currency note, people with less than Rs 15000 per month income can comfortably manage even without a bank account. People with more than 15000 per month income can use banking routes as everybody in India with more than 15000 per month income has a bank account and banks have their presence almost at taluka level.

Elimination of higher denomination currency notes will also prevent printing of fake currency by our neighbour as printing of lower denomination and its circulation will not be economical for fraudsters. They are not interesting in printing Rs 50 on account of high cost and low gain. They prefer printing Rs 500 and Rs 1000 as gain is very high.

Today the higher currency notes are helping (1) black marketers and corrupt people who indulge in huge cash transaction away from banking routes and (2) terrorist organizations/illegal organization who counterfeit these high demonization currency notes.

Taxing Agricultural Income like business income: All the tax evaders, including businessmen, politicians and bureaucrats misclassify their taxable income from other sources and ill gotten income from corrupt practices as agricultural income and pay no tax on this and they do not want it to become taxable. So any move to tax the agricultural income is being opposed within the ruling party itself. The result is that in the name of agricultural income billions of taxes are being evaded and black money is generated.

The economic well being of a person, who derives his income from agricultural sources does not differ from that of a person, who derives his income from other sources. Why should a poor clerk earning 20000 a month pay taxes while a rich farmer earning 100,000 a month from agriculture pays no taxes? The principle of equity dictates that they should be taxed in a similar fashion. At present, however, there is no tax on the agricultural income in India and even the filing of a return is not necessary in most of the cases.

The lack of tax on agricultural income leads to evasion of taxes in other sectors. In India, incomes from other taxable sources are being disguised as agricultural income. For disguised agricultural income, one does not need to find even a fake employer. Only thing they need to have is some agricultural land. Diversion of income from other sectors to the agricultural sector thus is very easy. On the other hand, if the government imposes a tax on agricultural income, tax collection from other sectors will increase. All developing countries should tax income from all sources. The Direct Taxes Enquiry Committee of India has also suggested that uniform and progressive taxation should be introduced for agricultural income to ensure that the agricultural sector no longer offers scope for tax evasions.

Today the agricultural income is not taxed in India mainly because of political reasons and partly because of constitutional hurdles. Article 246(3) of the Constitution confers powers on states for raising revenue by taxing agricultural income, in which none of states are interested at the moment. For taxation by federal government, agricultural income would have to be moved from the State List to either the Concurrent List or the Union List of the seventh schedule of the Constitution. Moving it from the State List to the Concurrent List or the Union List requires a constitutional amendment.

It is not that once a tax is imposed, farmers will start paying taxes. Farming in India is at the subsistence level. There is hardly any profit in agriculture. Therefore, imposing a tax on agricultural income will not affect most farmers as there is no profit in the agriculture. Secondly a higher exemption limit can be provided for this sector if government does not want to tax even mid size farmers so that they will remain below the exemption limit.

It's high time that this sector is taxed. The moment agricultural income is taxed, it's not that government will get tax from agricultural income; rather the tax collection from other sectors will go up as income of other sources will not be declared as agricultural income.