Before anything else, I’d like to thank and congratulate you on furthering the Swachh Bharat Abhiyan with the master stroke of cleaning the black money menace. It is a very good exercise and will eliminate the existing black money to a great extent.
While all noble ideas emerge from our mann (heart), it often takes our dimag (mind), to execute them to fruition. Therefore, here I humbly propose some ideas to ensure that demonetization brings forth the impact you and your team visioned, while minimizing the trouble for the common man.
Now, we should try to restrict the methods for generation of new black money and identification of jugaads (hacks) done by people to convert their black to white in these famous 50 days.
- “Crowdsourced fake transactions” discovery scheme: Ask the Indian public to check their passbook and bank-statements for any suspicious entries of deposit/withdrawal transactions. If any, they should report them to an exclusively-set government portal with the bank name, branch and scanned copy of their passbook/statement. The IT Department/RBI will then send notice to the said bank’s branch manager, asking them to produce the proof (CCTV footage / signature on deposit slips / self-cheques). If the bank manager is not able to provide evidence, a case shall be filed against that manager and (s)he would be suspended immediately. The person reporting the case would get 10% of the amount when its actual trail is recovered.
- “Old currency exchange” fraud detection: As it was compulsory to submit an ID proof while exchanging old notes, banks already have that data. Though it will take some time, let’s get that data entered in a system (and generate some employment!). This will give us information like Aadhaar number, PAN number, city, bank and branch of every Indian who has exchanged old currency notes. Then, let’s generate a list of all the people who’ve exchanged more than INR 4500, and send them notice on their Aadhaar/ PAN address. If they do not respond to the notice within 30–45 days, issue a warrant against them. While serving the notice, also collect information like his employer name, current address etc. In all likelihood, it’s their employer’s money which they got exchanged. Summon the employees, get the names of their employers (by interrogating them or by checking their EPF/ESI records) and eventually send a notice to the actual perpetrators.
- “Traders’ revenue spike” anomaly detection: The balance sheet of jewellers, car dealers, iPhone dealers should be treated differently this year. A deeper scrutiny should be done of all such traders’ books with special checks on back-dated transaction detection, using methods such as ink-matching systems and data triangulation.
- “Scrutinizing bank transactions” using big data: Ask all banks to mandatorily push all their transactions between 10th Nov 2016 and 31st March 2017 into a centralized system along with account holder’s name, address, linked phone, email and PAN/Aadhaar number. The system will identify suspicious activities, rank them on basis of their severity, and issue notices to account holders on their registered email/mobile/address automatically.
While doing so, the system will take into account their previous years’ income, returns, and whether they are salaried/unemployed/housewives who may have deposited a considerable amount (say 70–80 grand) and withdrawn it within one-two months through cash or account transfer.
- “Land deals” scrutiny: During these 50 days, real estate sales have also soared as people are buying properties even at inflated prices to get rid of their old currency notes. All registration records for these 50 days, should be scrutinised.
- “Jan Dhan Accounts” restrictions and auditing: It appears that most of the Jan Dhan scheme accounts have been used to temporarily park rich people’s money. Therefore, after 1st Jan, cash withdrawals on these accounts should be restricted to 10 or 20 grand per month. Trails of all the cheques/online transfers from these accounts should be monitored to identify the actual owner of the money.
- De-incentivize “gold purchases”: Apply more taxes on gold purchase and increase the import duty, so that it becomes costlier for people to keep black money parked in gold. The solution would be to make it illegal to have possession of more than a specified limit of gold which is undeclared in one’s ITR.
- Make “Power of Attorney” invalid: By now we’ve already learned that liquid cash is a small portion of black money. Most of the black money is parked in real estate. Government should give a time period for public to get their land/homes registered after paying stamp duty (at a lower rate or free of cost). After this period, all properties which are not on government records should be declared illegal, sealed, and further auctioned to builders to provide ultra-low-cost housing for weaker sections.
- Add “notional rent” in income tax return: Make it mandatory for land/property owners to link their Aadhaar/PAN with property records. As per the current income tax laws, except for one property (self-occupied), rental income from all other residential and commercial properties has to be declared in income tax return, and tax has to be paid on that. Simply, implement this.
- Add a “cash withdrawal tax”: IMHO 10K of cash is more than enough for a person per month to spend on places where digital money is an issue (like salary to maid, driver, parking, grocery purchase etc). Any amount withdrawn from account above 10K per month (per person on all accounts combined) should be taxed at source, say at a 5% rate. If an Aadhar/PAN is not linked with a bank account, there won’t be any non-taxable limit and any amount withdrawn would be taxed at 5% flat rate.
- Restrict “unsecured loans”: Unsecured loans in individual/HUF/firm accounts should be allowed only from relatives, as in the case of private limited company. Any loan from outside parties must be made taxable.
- Abolish “HUF”: Creation and operations of HUFs (Hindu Undivided Family) should be abolished at the earliest as it is being used by tax practitioners for parking black money, as normally no business activity in general is being carried through any HUF accounts.
- Introduce “agriculture income taxation”: After the success of Jan Dhan Yojna, most farmer brothers have bank accounts. Therefore, all agriculture income should be routed through bank accounts only. Tax exemption should only be available on income submitted into the bank account.
Sir, since we as an employee or small professionals also do a lot of hard work and are allowed an exemption of up to Rs. 2,50,000 per annum, a limit should also be fixed for farmers. It can be higher as their fortune depends on monsoon. Nevertheless, a limit should be there as is the case of other hard working people.
- “Flat fee” for Stamp duty: Buyers and sellers conduct property transactions in both white and black (cash). Why? Because the seller saves on the long-term capital gains and the buyer saves on the stamp duty (4–8%). Now what if we make the stamp duty/registry a flat fee for a city/state? There won’t be any incentive for buyers or sellers to not show the whole purchase in white.
- “Performance incentive” to tax professionals: In general, entry operator get 1–2% on the amount converted (which some professionals do by compulsion and peer pressure, but not by choice) and if they may get credit from government they may try to avoid indulging in illegal activities. Further, this amount need not be paid to them, but should be adjusted against their own tax liability (it will not be refunded in any case or some limit may be fixed) and in this case cash flow of government will not be affected.
Tax Professionals (CAs and advocates) should be given incentive to encourage their clients to pay actual taxes. As in the case of banks/insurance companies, they pay commission to DSA (direct selling agents). Similarly, tax professional should also be given incentive (say 0.50%) of the total tax paid by the clients during the year will be credited to their advisors/auditors accounts.
- Incentivise defence donation with “Tax Benefits”: In Income Tax law, there are/were numerous exemptions for paying donations to various organization and in some cases it used to 150–200% of the amount contributed. As you know these trusts are generally used as money conversion factories but at this juncture if we create a NATIONAL DEFENCE FUND (under the management and aegis of PMO) and anybody contributing towards these funds will get 150–200% of the amount contributed from the Gross Total Income then many indians will contribute towards this funds and our soldiers will get latest weapons and safety instruments (like bullet-proof jackets and vehicles) and we will save our sons of soils. Further a NATIONAL DEFENCE FUND FOR SOLDIERS FAMILY should also be created to run and operate schools/hospitals for the soldiers and their family. Funds for creating these schools/hospitals can be generated through donations from citizens of india by giving them extra deduction in the shape of 150–200% from their total income. Till now these deductions were misutilized to a great extent but now we can have faith in you and you can also trust us. I would be happy to contribute first two lacs each for both these funds.
- “Anonymous” assessment on video conferencing: The biggest threat to implementation of above points is corruption in Income Tax offices. Black money has grown in India because IT officers have allowed it after keeping a cut for themselves. Even honest individuals/businesses have to pay bribe to income tax department to avoid harassment. Its very important that this loophole gets addressed before implementing any scheme. IMHO, not more than 8–10% income tax officers are honest, so Govt can’t rely on these officers.
I propose an automated and online system for assessments. Say, a Gurgaon company’s assessment is assigned to an IT officer in Jharkhand without disclosing the name, identity of company to officer. Both parties (income tax officer and assessee) will get schedule for an online video/telephone conferencing (recorded on cloud) based assessment without disclosing each other’s identity.
- “Performance bonus” to IT officers: Like corporates, create a new salary structure for Income Tax Office staff with variable bonus, which is linked to total tax collected. Higher the tax collected by the government in a year, more the bonus for IT department staff.
- UPI “cash-back” schemes: Like paytm/mobikwik/freecharge; government should also start cashback schemes on using online payment methods like UPI/IMPS/Debit card. Most of the businesses evade income tax because customers give them chance by paying in cash. If customers gets benefit in paying digitally, they would force merchants to accept digital money. Also cash withdrawal tax will further force customers to go cashless.
You have taken the first, and indeed a very big step towards making India a country our children would be proud of. I congratulate on the intention, while reminding that a lot has to go in planning and execution to make this happen. From calibrating cash machines, we’ve to quickly move to a well-calibrated political and administrative machinery of the country.
If I may…
I am the founder of Sparse Labs, a delivery-tech startup which got acquired by Zomato. I have a rich experience of 15 years in building robust tech products, and I’m also a reputed personal finance blogger. Check my profile on LinkedIn.
Mr Modi, if you and your team feels that the country can benefit from these steps, I am willing to leave my current job (VP-Product at Zomato) and work on their implementation, without any salary. Much as I like and value my work, the opportunity to change India’s tomorrow is an honour I wouldn’t pass for the world.
P.S. The views and suggestions expressed here are strictly my own and are not affiliated to any other person, organisation or political party. In fact, for these to work, they have to be as apolitical as they can be.
Originally published at Medium