Is Mr Modi soft on Blackmoney holders?

The Modi Government had run a Income Declaration Scheme (IDS) for people to declare their black money. The deadline for IDS 30th September. 64,275 people had declared black money under the IDS scheme totaling to Rs. 65,250 crores. The penalty under this scheme was fixed at 45%. So it was expected that the Government will get 29,362.5 crores under this scheme.

This had made the Modi Government tom-tom its success. It was said that this is much bigger than the Voluntary Disclosure of Income Scheme (VDIS) run by the Congress Govt. in 1997 as VDIS had got 33697 crores from 4.72 lakh people. At that time the Government had got tax of 9,729 crore under VDIS.

Though the Modi Government was declaring success vis-à-vis the previous VDIS, one should realise that the size of economy today is way bigger than in 1997 and the present value of 33,697 crore will be way much bigger.

Now, a series of events appear to blow a big hole in the IDS scheme.

First a person from Ahmedabad who was to pay a tax of 13860 crores declared that he didn’t have that money and had declared on behalf of others. However, other people didn’t give him the money to convert, so he can’t pay up. Next, a person in Hyderabad had declared 10,000 crores and it was found that he didn’t have even 1 crore and had just made up this story to get attention to his business.

This has resulted in the the total size of IDS declarations to drop by more than half and even smaller than the VDIS of 1997. It is to be seen how the Modi Government gives a positive spin to this disappointing news.

It should also be noted that last year, the Government had run a similar scheme for foreign blackmoney holders. There were only 644 declarations and only 2,428 crores of tax collection.

Now, the Modi Government has said that if anyone wants to declare their undeclared cash and deposits in the bank accounts then they will have to pay 49.9% tax. So this becomes the third disclosure scheme by Modi Government within a year.

Three voluntary disclosure of income schemes by the Government in such a short period of time is virtually unheard. People will lose their faith in the system and will feel that honest tax payers are being discriminated against. Blackmoney holders will feel that they will always get some more opportunity later and will be willing to take a chance.

This doesn't fit in with the narrative of a strong Government. The Government now appears to be begging before people. Mr Modi and his ministers should think hard why they are repeatedly failing.

BlackMoney Penalty: Official method to recapitalise banks

Govt. has proposed to hold on to some of the money deposited in the banks if people can't satisfactorily explain the source of those money.

In the latest twist to the unfolding #Demonetisation drama, the Modi Government has proposed that people holding blackmoney can declare their blackmoney and pay 49.9 percent as tax and penalty. The breakup is as follows. Govt. will charge 30% as tax on the undisclosed income, plus there will be a 33% surcharge on it. And a 10% of the declared amount will be charged as penalty.

Apart from this, 25% of the declared income will have to be mandatorily locked-up in an interest free bonds for four years. Though the Modi Government doesn't officially say so, it expects this 25% to help in recapitalising the banks which have seen massive NPAs. For the record the Gross Non Performing Assets (NPAs) of Banks in March 2016 was 7.6%. And this figure was expected to increase to 8.5% by March 2017 and if the macro-economic situation deteriorated then it could increase to 9.3%. (Source: RBI Projections) http://arjunaubacha.blogspot.in/2016/11/compensating-citizens-for.html

For example, if it can get say 1 lakh crore voluntarily disclosed as previously undeclared and hence untaxed amount which we refer to as blackmoney, then 25% of it would be 25000 crores. So this 25000 crores would be locked up for 4 years and help in recapitalising the public sector banks.

The Government was expected to inject some 40,000 crores of rupees into the banks which would have been too little. So the Government is trying to get the funds from public to recapitalise the banks.

The Government has also said that if people don't declare their undisclosed income and then get caught, then they will face penalty of 85%.

Since 9th November, a lot of people have been illegally helping change unaccounted for cash of people by taking commissions of 30 to 35%. Some people who have more than 5 or 10 crores of rupees have also given some 50% as commission to some bank employees and Income Tax people to get new notes. So the Government's proposed 49.9% combined tax, surcharge and penalty may find some takers.

Since a lot of people out of fear of persecution by Income Tax department won't declare their previously undisclosed income, the Government is trying to threaten with the higher figure of 85% if they get caught. It is a common knowledge, that the Income TAx department is grossly unprepared to handle such massive volume of cases. So it would be a big help for the Government if more people come forward and declare their previous undeclared incomes.

Till date some 8 lakh crores of rupees have been deposited in the banks. The Government was expecting that this number will be much lower. If this rate of deposits go on, then most of the 1570 crore 500 rupee notes and 630 crore 1000 rupee notes will get deposited in the banks. That would be a nightmare scenario for the Government. They had thought that if some of the notes don't come back, then RBI will knock off that amount from their books as liability and then give back the same amount to Government as dividend. The creative ways many people have adopted to deposit their blackmoney in the banks has raised the tension of the Government. If the Government can't get back money in dividend from the RBI, then it can't have a lower fiscal deficit and also it won't be able to recapitalise the banks.

So the Government now has come out with this idea of a voluntary disclosure. However, the Government is not using the word voluntary disclosure because its Voluntary disclosure scheme has just ended on 30th September.

There are some people who have 8-10 crores of cash. Some of them who were previously despondent, may go and declare it to the Government. Since they were anyway giving 35% as commission to agents, so giving a bit more and buying peace of mind may be preferable to some. However, knowing the fear of the income tax department, not everybody will agree to declare. So the Income Tax team may need to do a lot of work. Recapitalising banks won't be such an easy job.

Nevertheless, already the banks are flush with cash deposited by people. All these money is locked up in banks, as people can't draw more than 2000 rupees per day. This is expected to last for six months. So the banks have got some respite for six months from the NPA problem. The last word on this is not yet heard. However, the cover of the Modi Government that this is a people centric move is slowly getting blown and the main aim to recapitalise the banks and give a positive spin to the PM's image is now becoming clear to many people.