Is Modi government winning the black money fight?

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New Delhi: The government has been scrambling since the demonetisation drive began on 9 November to stay a step ahead of black money hoarders. It has had to constantly rewrite the rules to do this, inviting flak for the constant changes in regulations.

From changing the rules governing exchange of currency at banks and post offices as well as on the usage of old Rs500 and Rs1,000 notes in different places to tightening the reporting requirements by banks on cash deposits to proposing changes in tax laws to make it more attractive for tax evaders to voluntarily declare their undisclosed income rather than trying to legalize it through illegal means, the government has been on its toes trying to outmanoeuvre the tax evaders.

“The government has had to roll back some of the measures it had announced. But all the steps that were taken were aimed at countering the misuse of some of the measures that were announced. For instance, in exchange of currency notes, we were seeing large scale misuse,” said a senior tax department official, who did not wish to be identified. He was referring to the government’s decision to stop exchange of currency notes at bank counters with effect from 24 November despite initially promising to continue it longer.

Prime Minister Narendra Modi announced late on 8 November that old Rs500 and Rs1,000 notes would cease being legal tender from 9 November. The move, he argued, would help in curbing black money, counterfeit currency and terror financing. People were given time to deposit the currency in their bank accounts by 30 December.

A month since, fears are growing that demonetisation may have limited impact for several reasons, including the innovativeness of tax evaders. The fact that with still three weeks to go for people to deposit the old currency, more than Rs11.55 trillion of the estimated Rs16 trillion of such notes in circulation has been deposited in banks has added to the worries of the government.

The income tax department has received intelligence that tax evaders are using several methods to legalize their black money. The modus operandi varies.

From colluding with jewellers for buying gold jewellery with back-dated bills, to using money launderers to convert the old notes into new for a small fee, even incentivizing the poor to deposit the money into their Jan Dhan (no frills) bank accounts for a small commission, tax evaders are surprising the taxmen with their ingenuity.

As the tax department and the central bank step up their monitoring of suspicious transactions, instances of bankers colluding with tax evaders to launder black money are also coming to light.

Though constrained by the lack of personnel, the income tax department is aggressively using technology to keep track of suspicious transactions. It has conducted many search operations on jewellers and known money launderers, looking for irregularities. Banks have made reporting requirements more stringent to ensure all large deposits are reported to the tax department.

The surge in the deposits prompted the government to introduce a legislation in Parliament last week encouraging tax evaders to voluntarily come forward and declare their unaccounted income and escape with a tax and penalty amounting to 50% of undeclared income rather than using conduits to legalize their wealth. The legislation, which is awaiting Parliament’s nod, also proposed to increase taxes and penalties for those who do not opt to make the disclosure. Tax and penalty in these cases could amount to more than 80% of the undeclared income.

“The presumption was that around 10-15% of the currency will not come back and there will be windfall gains. But now it seems there has been a miscalculation on the part of the government and there will be virtually no demonetisation.

The income tax department is left with little choice but to comb through the deposits and look for black money for the next two to three years. But it is constrained by its limited manpower,” said M. C. Joshi, former chairman of the central board of direct taxes.