by Vivek Kaul
What this tells us clearly is that there is widespread tax evasion in the country. This tax evasion continues to generate a lot of black money, a major part of which continues to remain in the country. This is the black money that the government should be going after, instead of having dreams of getting back the black money that has already left Indian shores.
Information technology can play a huge part in this. In fact, it already has. As the FICCI report cited earlier points out: “The Integrated Taxpayer Data Management System is a data-mining tool implemented by the Income Tax Department that is used for detection of potential cases of tax evasion. The tool assists in generating a 360-degree profile of the high net-worth assessees.” The government should work towards making this tool even more robust by building more data into it in the days to come.
Furthermore, it has to get cracking on the real estate sector, where the maximum amount of black money is invested. This black money generates more black money. Going after the biggest property dealers of the National Capital Region, where most of the black money changes hands, might be a good starting point. While real estate is a huge generator of black money, it is also a huge conduit. In fact, it is difficult to estimate where one link ends and another starts. If this has to change, then the nexus between builders and politicians needs to be broken. For this to happen, the political parties need to be brought under the ambit of the Right to Information Act. And that, as we shall see in the conclusion to the book, is easier said than done.
One viewpoint is that the black money that remains in the country has some benefits. As Ha-Joon Chang writes in the context of a minister taking a bribe (which is also black money, given that the minister is not going to declare the bribe as an income): “A bribe is a transfer of wealth from one person to another. It does not necessarily [emphasis original] have negative effects on economic efficiency and growth.”606 If the minister taking the bribe decides to spend/invest that money in the country, it has a positive impact on economic growth, as the spending creates economic demand and the investment creates jobs.
At least in theory, the idea seems to make sense. In comparison, the black money leaving the country is a total waste. As Chang writes: “A critical issue… is whether the dirty money stays in the country. If the bribe is deposited in a Swiss bank, it cannot contribute to creating further income and jobs through investment—which is one way odious money can partially ‘redeem’ itself.”607
Hence, as per Chang, black money, if invested properly, can create jobs as well as economic growth. In the Indian case, a lot of this money gets invested into gold and real estate. Money going into gold does not create any jobs. And money that goes into real estate has driven up home prices, in particular, all over the country to extremely high levels. Most middle-class Indians cannot afford to buy a home now.
As mentioned earlier, a huge number of homes that have been built and sold continue to remain unoccupied. Furthermore, there are a huge number of homes that have been built but are not finding any buyers. Estimates made by real estate consultants put this number at around seven lakh across the top metropolitan cities.
In a normally functioning market, the prices of these flats would have fallen, and they would have got sold. But builders cannot cut prices because they don’t want to hurt their original investors, who had helped finance the real estate project.608 In many cases, these investors happen to be politicians who have helped finance the project by investing their ill-gotten black money into it. Hence, the black money of politicians keeps real estate prices high. And that is not a good thing.
Another point that also needs to be made here is that affordable housing has to see the light of day if the Make in India programme has to take off. If employees are to be attracted to work in factories and industries that will be built in the years to come, affordable housing around the sites needs to be available. And this will only happen if the nexus between builders and politicians is broken down.
Given this, it makes tremendous sense for the government to work towards ensuring that the total amount of black money being generated comes down instead of making noises about recovering the black money that has already left the shores of this country.
Furthermore, the focus should be on ensuring that the number of people paying income tax goes up in the years to come. Finance Minister Jaitley told the officials of the Income Tax Department in May 2015: “You have the responsibility to recover every rupee which is due to the government…. A tax is either payable or not payable. If it is not payable, then no attempt has to be made to recover it; but if it is payable, then there is no scope for any collateral consideration [as to] why it must not be recovered for the government.”609
All this boils down to the Income Tax Department and how it goes about recovering black money. The past evidence isn’t very encouraging, as can be seen from Table 9.7.
Table 9.7, on seized assets and undisclosed income, makes for a very interesting read. The value of seized assets was higher in 2011-2012 than it is now. In fact, the undisclosed income identified peaked in 2011-2012, and then fell dramatically. What this clearly tells us is that the record of the Income Tax Department in going after black money over the past few years has not been particularly good and can, at best, be described as erratic.
One possible explanation for this is the fact that, when corruption during the second term of the UPA peaked, the Income Tax Department stopped going after people with a serious amount of black money, and that it has still not managed to change its course. While we may keep thinking of reasons, what this data clearly tells us is that Jaitley was being overly optimistic regarding the black money recovery skills of the Income Tax Department. And that clearly is not good news for all the black money recovery plans that the government has.
Table 9.7: Recovery of black money between 2009 and November 2015.
Financial Year Seized Assets
(in Rs. crore) Undisclosed Income
(in Rs. crore)
2015-2016
(up to November 2015) 470 6,167
2014-2015 762 10,288
2013-2014 808 10,792
2012-2013 575 10,292
2011-2012 906 14,017
2010-2011 775 10,649
2009-2010 964 8,101
Source: Annual Reports, Ministry of Finance.
In fact, Prime Minister Modi, in an address to the nation through his Mann ki Baat radio programme on June 26, 2016, said:
We lose our peace by violating rules. Why not give correct information about our income and assets to the government?... The government has presented before the country a special facility to disclose undisclosed income by the 30th of September [2016]…. We can… free ourselves of various burdens just by paying a fine. I have also promised that [regarding] those who voluntarily declare to the government their assets and their undisclosed income, the government will not conduct any kind of enquiry. Not once will they be asked from where all this wealth came and how it was acquired…. I had even told the Members of... Parliament that, after 30th September, if any citizen is put through any difficulty, the one who does not want to follow [the] due rules of government, then it will not be possible to help them. I want to say this to the people of the country: that we do not wish that after 30th September anything should happen that will cause difficulties for you.
The message from Modi is clear to those with black money: Come clean, or else the Income Tax Department will come after you. It is important that Modi and Jaitley not overdo this by setting ambitious recovery targets for the Income Tax Department. There is something that they can learn here from the Indonesian President Joko Widodo, who assumed office in 2014.
Widodo wanted to up the tax-to-GDP ratio, which was at 12 per cent. Some of his advisers suggested that he try to fix the problem by getting the tax collectors to increase the tax collections by 50 per cent in a year. The Finance Ministry cut this to 30 per cent. Even the lower target of a 30 per cent jump was too much to achieve during the course of
one year.
As Sharma writes: “In order to hit the target, tax agents resorted to such means as staking out car dealerships and real estate sales offices to collect on the spot. Not surprisingly, car, motorbike and property sales slumped. Businessmen deferred their investment plans, and the economy slowed [down] further.” While Widodo had the right idea for the long term, it did hurt in the short term.610
This is a mistake that India should not be making. The Income Tax Department should not be allowed to run loose. Furthermore, it is important to keep working on getting more and more people onto the digital financial system, so that more and more data is collected and can be tracked to build proper 360-degree profiles. As can be seen from Figure 9.2, the number of income tax returns being filed electronically has gone up over the years. The aim should be to make the tax-filing process simpler, so as to get more and more people to file their tax returns. This would go a significantly longer way in helping more people come under the income tax bracket and, correspondingly, increase the government’s tax collections.
Figure 9.2: Number of tax returns filed electronically since 2006 (in lakhs).
* Up to November 2015.
Source: Annual Report, Ministry of Finance (2015-2016).
At the same time, it is important that the Income Tax Department go after those in the upper echelons of society who have black money. The recovery rate of the department is currently pretty low, and this needs to improve significantly in the years to come.
Interestingly, over the past few years, the government’s tax-to-GDP ratio has come down. In 2007-2008, the tax-to-GDP ratio was at 11.9 per cent. By 2015-2016, this had fallen to 10.6 per cent. This means that the government lost out on taxes worth Rs. 1,76,000 crore in 2015-2016. This is a huge number, and much more than the black money that will ever be recovered.611
Tax collection can be improved by cutting down on the Big Government that affects the tax-filing process. It needs to be made simpler. Furthermore, as mentioned earlier, the income tax laws need to be made simpler as well. All this would help many more people come under the tax bracket and start filing tax returns.
xvi During the final stages of writing this book, the Income Tax Department released data for the assessment years 2013-2014 and 2014-2015.
10. THE FISCAL DEFICIT FUDGE
Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital.
– AARON LEVENSTEIN
As we have seen, Big Government can prove to be very expensive. In some cases, the expense can be expressed in terms of money. Take the case of the many public sector enterprises losing a lot of money every year. A substantial part of these losses are bankrolled by the government. Or take the case of State Electricity Boards’ accumulated losses of close to Rs. 4,00,000 crore.
Then there is the case of the leakage of food, fertilizer and petroleum subsidies, which is ultimately government expenditure getting wasted and not reaching those it is intended for.
But there are also things like black money, which are also partly a result of Big Government and which prove to be expensive for the government. As discussed earlier, black money leads to the government earning lower taxes. It also leads to other repercussions, like inequality and higher interest rates. The trouble is that it is difficult to put an exact number as to how expensive this turns out to be.
Nevertheless, all these things have an impact on the fiscal deficit of the government. Fiscal deficit is the difference between what a government earns and what it spends. It is normally expressed as a percentage of the GDP.
If a government finances loss-incurring companies, either its expenditure goes up or it has to cut down on its expenditure in other, more important allocations like health and education. Subsidy leakage also means that the government has to spend more than it should if it wants to reach a larger proportion of the population. This leads to a higher fiscal deficit. In the case of black money, lower tax collections lead to lower government revenues, which in turn lead to a higher fiscal deficit.
It is important that the government maintain a certain level of fiscal deficit. Typically, it is felt that a fiscal deficit amounting to around 3 per cent of the GDP is good enough. This is because any government finances its fiscal deficit by borrowing from the financial markets. The government borrows by selling government bonds.
When the government sells bonds, it takes away savings from the financial system. These savings could have gone somewhere else instead. Hence, excessive borrowing by the government tends to lead to higher interest rates. Given this, it is important that the government borrow money to finance its fiscal deficit only within certain limits.
The various Indian governments over the years have been trying to achieve a fiscal deficit of 3 per cent of the GDP. In fact, the current Finance Minister, Arun Jaitley, also started his term with the aim of achieving the holy grail of fiscal deficits.
As he said in his first budget speech in July 2014: “We need to introduce fiscal prudence that will lead to fiscal consolidation and discipline. Fiscal prudence to me is of paramount importance because of considerations of inter-generational equity. We cannot leave behind a legacy of debt for our future generations. We cannot go on spending today, which would be financed by taxation at a future date.”
He further said: “One fails only when one stops trying. My road map for fiscal consolidation is a fiscal deficit of 3.6 per cent [of the GDP] for 2015-16 and 3 per cent for 2016-17.” Jaitley’s point was that, if the government spends more now, its borrowing will go up. And these borrowings will have to be repaid by taxing future generations, which, of course, isn’t a good thing.
While presenting the 2015-2016 budget, Jaitley conveniently forgot what he had said in the 2014-2015 budget speech, and pushed forward the fiscal deficit target of 3 per cent of the GDP by one year. As he said in his second budget speech in February 2015: “With the economy improving, the pressure for accelerated fiscal consolidation… has decreased. In these circumstances, I will complete the journey to a fiscal deficit of 3 per cent in 3 years, rather than the two years envisaged previously. Thus, for the next three years, my targets are: 3.9 per cent for 2015-16; 3.5 per cent for 2016-17; and 3 per cent for 2017-18. The additional fiscal space will go towards funding infrastructure investment.”
Of course, the Indian government needs to spend money on many things. Given this, its annual budget and the fiscal deficit target evolve as things go along. In 2015-2016, Jaitley wanted to spend more towards funding infrastructure. And given the sad state of India’s physical infrastructure, nobody in their right minds can argue against something like that.
Nevertheless, it needs to be pointed out here that Big Government also has an impact on the fiscal deficit. As mentioned earlier, financing the losses of public sector enterprises leads to increased government expenditure and, in turn, the fiscal deficit going up. The generation of black money also leads to lower revenue for the government, and subsidy leakage leads to the government having to spend more in order to reach those whom the subsidies are intended for. These also mean a higher fiscal deficit. In the Economic Survey of 2014-2015, it was estimated that the total subsidies offered by the union government amounted to Rs. 3,77,616 crore, or 4.24 per cent of the GDP.
This included subsidies on rice, wheat, sugar, pulses, kerosene, cooking gas, electricity, water, railway services and fertilizers. Take the case of kerosene. As the Survey points out: “PDS kerosene allocations significantly exceed consumption in nearly every state – that is to say, nearly all states show a large amount of PDS kerosene leakage. In absolute terms, leakages are greatest in UP, West Bengal, Gujarat and Maharashtra; in per capita terms, leakages are greatest in Haryana, Gujarat and Punjab; and in percentage of actual allocations, they are greatest in the North-Eastern states of Manipur, Sikkim and Arunachal Pradesh.”
The Survey points out that the fertilizer subsidies amount to a total of Rs. 72,000 crore. The subsidy on urea (a type of fertilizer) amounts to
Rs. 50,300 crore. Of this, only Rs. 17,500 crore, or around 35 per cent, reaches the small and marginal farmers, who are the intended beneficiaries.
As the Economic Survey of 2014-2015 points out: “Leakages not only have the direct costs of wastage, but also the opportunity cost of how the government could otherwise have deployed those fiscal resources.”
What Big Government also does is push the fiscal deficit of the government beyond a comfortable level of both the target that has been set in the budget as well as the long-term target of 3 per cent of the GDP.
Despite this, finance ministers are still able to meet the target that they have set. How is this possible? As explained earlier, fiscal deficit is expressed as a percentage of the GDP. While, the GDP figure is not really under the control of the government, the fiscal deficit figure is. Over the years, this fiscal deficit figure has been manipulated to arrive at the target that has been set in the previous budget.
Let’s take the case of 2015-2016. While presenting the budget in February 2015, Jaitley had set a fiscal deficit target of 3.9 per cent of the GDP. And this target was achieved.
The question is: How? This was done by not paying food and fertilizer subsidies worth more than Rs. 1,00,000 crore. As the economist Ashok Gulati wrote in a December 2015 column: “The… unpaid fertilizer and food subsidy bills have together already crossed Rs. 1,00,000 crore.”612 The fertilizer subsidy bills that were unpaid at that point of time had stood at Rs. 40,000 crore. Gulati expected the unpaid fertilizer subsidy bills by the end of the year to touch Rs. 48,000 crore.
At the same time, it was expected that food subsidies to the tune of Rs. 70,000 crore would remain unpaid to the FCI (the Food Corporation of India) by March 2016.613 By not acknowledging the more than Rs. 1,00,000 crore that had already been spent as food and fertilizer subsidies, Jaitley was essentially able to meet the fiscal deficit target of 3.9 per cent of the GDP for 2015-2016.