Industrial Economist (IE): Are there any fruits of demonetisation that can be incorporated into the budget?
Lakshmi Narayanan (LN):
Lakshmi Narayanan (LN): There are two clear messages behind demonetisation. One, this Government has zero tolerance for corruption; and two that tax evaders can hide but cannot escape. While some in the government has repeated this message, in words, spirit and action, it has to assume a mission mode, where every chief minister and every Union minister reiterates this message ad nauseam. As we say in the corporate world, the ‘tone at the top’ drives the culture down the line. As every state and Central minister act in unison with these two messages, the stage is set for ‘TRUST.’
Now is the time for the administration to be trusting corporates, individuals and institutions. The carrot has been presented with Income Disclosure Schemes 1 and 2; the stick has been wielded through demonetisation. The message is clear and understood. Therefore, the government actions should be driven by the motto ‘Trust but verify.’ The people of India have experienced some of the most difficult times during demonetisation and they should not allow their sacrifices to go a waste.
Simplifying tax rules, eliminating subsidies, incentivising investment in capacity building can now be undertaken confidently. Each of these can be undertaken in the spirit of self-assessment and self-regulation on the part of industry and institutions. That is the trusting part. The verification part can be executed by government and other agencies, like audit firms and institutions, vested with authority – authority to penalise.
Private investment in capacity building and growth has lagged behind government spending in infrastructure and other capital formation activities. It is time that industry, big and small, shows new entrepreneurism and invests in the country. The rapid shift from informal to the formal sector, while visible in retail, is continuing in other sectors as well. It is essential for industry to create jobs and move more and more skilled resources into the formal sector. A simple and thought out programme, like the government taking part in the industry’s Provident Fund burden additionally would lead to job creation on a large scale and also drive consumption. This may be a better way of incentivising job creation, rather than tax breaks.
M R Sivaraman (MRS)
M R Sivaraman (MRS): It ‘s hard to answer this question unless the details of tax collections become final. Newspaper report says that there has been a spurt in the collection of both direct and indirect taxes. The only likely benefit is a spurt in the fiscal collection of both the state and central governments. But if the government machinery is not alert and there is no follow-up of the demonetisation programme with the banning of all cash transactions across the board above a limit it will have no effect. As an example, in Chennai, my personal experience is that there are significant cash transactions for the evasion of VAT. In the cases, I observed, the tax evaded was roughly Rs 5000 on a purchase of Rs 30,000 worth of polycarbonate sheets. This example gives the magnitude of fraud and the generation of black money. I do not think the officers bother about it as I have made this known to several of them or else we would have seen news of raids by the VAT authorities. So let’s be rest assured that with no adequate follow-up demonetisation will bear no sustainable benefits.
SHASHANK BHIDE (SB)
SHASHANK BHIDE (SB) First of all, there is a potential gain to the government in terms of unclaimed currency, the tax and penalty levied on income declared under the amnesty schemes including the penalty on income discovered in the process of currency deposits, etc. It is not clear whether the states will have a share in such gains of the Central government. However, there is also the revenue forgone due to slow down in the economy as a result of demonetisation at least in the short term, although some of the economic slow down that has happened is in the sectors which may be out of the tax net and therefore the direct impact on tax revenue may be less than the proportionate economic slow down. The budget should outline how the gains, monetary or otherwise, would be translated into more stable environment for new investments.
The positive impact of demonetisation would be significant if it is accompanied by a more transparent policy making and policy implementation.
It is understood that in the longer term, if the black money influence on the economy is reduced, there would be efficiency gains.
The net gain in the fiscal position would have to be used to achieve long term benefits. Jobs need to be created because economic slowdown in the industrial sector had preceded demonetisation. Stability in jobs is critical for the stability of the economy. Spending on strengthening infrastructure- both physical and social -- would be very important at this juncture.