IMPACT | 14 October 2016
Earlier this month, the Indian government announced that tens of thousands of people had taken advantage of a tax evasion amnesty scheme to declare more than $9.5bn (£7.3bn) in undisclosed incomes and assets.
It’s being seen as a financial windfall for the government and also being described as an unqualified success at tackling the country’s long-standing underground economy or black money problem.
Cash transactions are a way of life in India. They could involve simple purchases on the street, or large-scale ones involving suitcases stuffed with used notes to buy automobiles or even property.
A significant part of this cash flow is hidden from the government, to avoid paying tax.
Cleaning up this system and cracking down on black money has been a stated goal for India’s Narendra Modi-led government.
From June this year, the government ran a highly visible campaign, entreating citizens to use a four-month window to declare previously undisclosed assets and incomes in exchange for complete immunity from prosecution as well as anonymity, so long as they paid 45% in taxes and penalties.
“We conducted a series of town-hall meetings all over the country,” says Hasmukh Adhia, India’s revenue secretary.
“All the top officials as well as local-level tax commissioners attended. People had a lot of doubts about the scheme but we assured them of the secrecy aspect,” he added.
Image caption Real estate is a major source of illegal money in India
All sorts of people took advantage of the amnesty scheme.
A group of street food vendors from Mumbai are said to have contributed $7.5m. A real estate developer from Gujarat, Naresh Agrawal, who says he has an annual turnover of $45m, declared the equivalent of $6m.
“The rules have become much more stringent now. If you get caught using black money to strike a real estate deal, you have to pay 100% tax and penalties. No builder wants to take that risk,” Mr Agrawal said.
“Earlier you were always nervous of getting caught. Now that I have disclosed everything, I can sleep easier.”
That’s the reason why many believes this scheme has worked so well, especially when compared to previous attempts, because the government is making it harder for people to conduct large cash transactions.
“A lot of black money would get exchanged as part of property deals,” says Shalini Jain, a tax consultant with global financial services company, Ernst and Young.
“Now the government has made it mandatory to cut tax at source in these transactions, so it brings to attention any property transaction. This has discouraged many from going ahead with it.”
By some estimates, the government could raise nearly $4.5bn from the scheme. But it may not be as good as it sounds.
Image caption Finance Minister Arun Jaitley said the amnesty scheme was a success
Only 3% of India’s 1.2 billion strong population are said to pay income tax, yet less than 65,000 people came forward during this amnesty programme.
Economist Arun Kumar points out that it’s only a fraction of the country’s undisclosed wealth.
“You have to account for not just undeclared income but also the wealth it generates after it is invested, used to buy property etc,” he says.
“By my estimate, India’s undisclosed wealth is about 60% of its GDP, which makes it around $1.35 trillion.”
And, the big fish may have got away.
“We have to wait for the final breakdown but it appears that most of those who came forward are small business owners or relatively small players. The big hoarders have either not taken part or have only disclosed a nominal amount of their holdings,” Prof Kumar adds.
The government says it plans to use the money to fund public welfare programmes, so in effect it will plough the recovered wealth back into the economy.
It’s already been described as a resounding success. But it’s unlikely that it will make India’s black money problem go away.