The Government of India, Ministry of Finance, published a report entitled Black Money in 2012 to address the issue of the creation and prevention of ‘black money’. This 100-page report is just a bureaucratic paean to obfuscation: a lot of descriptive language with very little remedial value.
The document identifies the obvious means utilised to create black money and allocates blame externally. There is no reflection on the failures of prevention and enforcement; instead, the solution suggested is further enforcement along the lines of previously existing but ineffective enforcement bodies and activities.
There is no clear data on the quantum of such money in the Indian economy, but estimates vary from 10 to 40 per cent of GDP, that is, anywhere between $100 billion to over $400 billion (assuming a GDP of well over $1 trillion ).
If a nominal tax value of 20 per cent is assumed, that would mean a loss of $20-$80 billion, which at present exchange rates mean anywhere between Rs 85,000 crore and Rs 1,30,000 crore!
The two integral issues with black money are: “Who has it?” and “How much is there?” These two issues are critical as the sums involved can immediately affect the economic and social conditions of the country. This drastic problem requires drastic measures; the historic solution of amnesty towards the perpetuators of this phenomenon has produced results which are nowhere near satisfactory. We need to address this issue with an immediacy and resolution that will require imagination and will.
We propose a twin set of solutions that are interlinked and require consequential action.
Post Codes
The first issue is the location of the black money: Who has it? To address this, the Government has to redraw the post code system to ensure that an alphanumeric system is used. These designations have to be for a much smaller area than at present. Each street should have a unique post code.
At present we use a six-digit system that is more than 40 years old and a legacy of the colonial times. We have to update this to reflect a modern India and enable the clear identification of addresses and addressees across the nation. So, instead of a simple six-digit number as is being used at present, we suggest a system similar to the one used for vehicle registration.
This alphanumeric system can be the basis of all financial transactions in the future. It would be a clear link between all tax departments and unique to the resident of each post code.
New Currency notes
The second issue is how much black money is actually there? Rather than try to estimate the actual amount, we believe the Government should undertake a radical process of issuing new currency notes and cancel the existing currency notes. This exercise has to be undertaken after the previous exercise of post code allocation is completed.
The new currency notes would render the existing currency invalid and not worth the paper it is printed on. The holders of the old currency can exchange their currency at designated banks along with the submission of their new post code details. Those who use the existing banking system as a means to receive income, remittances, salary and payroll, will automatically have access to the new currency notes after they have updated their post code details.
Cash deposits to the banking system will have to be clearly identified and any currency deposited that does not have an income source will attract a tax of 40 per cent before the new notes are issued.
The Income Tax Act at present does not allow for transactions in excess of Rs 20,000 in cash, so a source would have to be clearly explained (rule 6DD).
This action would immediately invalidate all the old currency in the possession of black money holders. They will have no choice but to either submit their currency and bear a 40 per cent tax on the same or lose the entire stash. Also, as an added benefit, data will become available on the quantum and ownership of the money.
All those indulging in the informal international currency trade ( hawala ) will likewise be penalised as the market makers and brokers will be taking a huge risk to trade in currency notes that will have no value in the future.
It has to be made clear that the requirement is for currency to be printed in a new form or design, and not a devaluation of the currency.
Worth the time
The proposal will take time to implement but after more than 50 years of Independence and decades of laws and “enforcement”, we believe these proposals stand a much better chance of not only mopping up the black money in the economy but also laying the foundation for the future in terms of enforcement, tracing and regulation.
The change in the post code system should take only 12-18 months if done on a priority basis, enough time to organise the printing of new currency. This might seem like an expensive choice but a little thought on the possible benefits will surely reveal the economic sense.
This scheme would be self-paying as on the one hand the income from taxation of income would more than pay for itself and on the other, the long-term benefit of the system in place would allow for easier identification of people and easier terms of trade.
The impact on the impoverished and the salaried classes (the vast majority) would be minimal, only a change of address data in various systems.
On the other hand, it would be a case of mea culpa , mea culpa , mea maxima culpa for those with unexplained wealth, and a rightful contribution to the nation’s coffers. All this without raising taxes or penalising businesses or the poor!
Sundeep Manghat is an academic in the UK and Balasubramaniam.R is an independent consultant in India.