Saturday, April 30, 2005

Black to white...a long journey ahead

Considering that much water has flowed under the liberalisation bridge, the black market should have abated. Right? Not really.

Tax rates in India are still fairly high, which is an incentive for evasion. Therefore the doctor, with a wink and a nudge, accepts a cash payment and never bills it into his legitimate income. If you ask for a bill, he may even charge you higher. The pharmacist bills only those who ask for it, otherwise, he just hands over stuff to you and you walk away with the medicine sans bills, without realising that this small change adds up into crores of evaded tax. Hotels, in any case, rarely maintain bills, or maintain a parallel register for tax purposes.

But if companies product x amount of stuff which is sold for y rupees in the market, shouldn't the government not collect taxes which is a percentage of x*y? In these days of sophisticated systems, would it not be easy to detect that a certain percentage of goods never showed up in the tax books?

Perhaps, it would, if all states had a uniform tax structure and such a system existed (The VAT is taking us there, but it will be a while).
Perhaps, it would, if all tax officials were uniformly incorruptible (this is perhaps the biggest if, which lets goods evade tax and flow into the market).
Perhaps it would if tax structures were simpler, easier to file through and track by the use of an electronic system.

Service incomes are harder to pinpoint and I can agree that some amount of evasion would be taken for granted, notwithstanding code of ethics of governing bodies.

But my guess is that the subsidies which exist at various levels play a role in the creation and sustenance of the black market. Many traders dont have to pay tax; they not only do not pay tax, but also stop short of filing their returns. Sales tax officials, Central excise officials oblige traders who want to make a quick buck. People under declare their income by splitting it across various non taxable ( read, people who dont file returns) categories like senior citizens, minors etc. Farmers (including the richest of them all) dont have to pay taxes. Small scale industries have a different tax structure. Many large companies are actually are a set of small units strung together by legalese. The tax net in India has an absurdly low percentage of its population in it. Thus a small tax paying percentage of the populace, supports a huge non tax paying population.

The government has tried to stop the growth of the black market by the abolition of 1000 rupee notes and 500 rupee notes (they have since been brought back), a Voluntary Disclosure of Income Scheme and tax rationalisation. Yet, there is an incentive for being in the black, the economy. Is there is a solution? There are many, and I suspect that there is no one solution.

One by one we are getting there. From a paper based capital market trading system, we are moving into an electronic system where an investor with multiple joint accounts with his family members will be treated more or less as one source.

The VAT will slowly start pulling the long chain (tail) of tax payers, making it difficult for dishonesty, even if there is one honest payer in the chain. The VAT will take us closer to a state where every billing is noted and tax paid on it.

Once central excise and sales tax go into an electronic mode as do customs duties, there would be greater transparency and ease of filing returns. Real estate is a big drag. Though low interest rates, greater share of salaried individuals buying apartments has brought the new sale market into a full white mode, the second sale market is a pain. Rationalising registration costs and making the registration office corruption free would help in nailing those who undervalue property.

What about all the gold hoarded. Hoarded gold never gains interest, though gold prices have been rising for a while now. Creative solutions are necessary here. Gold bonds have been tried and met with limited succes. But gold gotten with illegal money does not stay as gold, it is converted into ornaments and finds its way into the market, slowly but surely. Perhaps cash purchases of gold ought to be tracked.

Politicians incomes, babus bribe are the other big source. A lot of it is probably in Swiss banks and will continue to stay there. Reissuing currency is perhaps an idea worth a thought (but since this cannot be done every few years, it is a one time weapon because of the costs involved). Making foreign exchange flows transparent by reducing the margins of banks and the transfer agents would stem the hawala trade.

Farm income has to be taxed, even if for a marginal amount and definitely the rich farmers have to taxed more. That is a huge chunk of unaccounted money floating there with a lot of people claiming fraudulent farmer status and ending up paying no tax.

Perhaps the single biggest move towards eliminating the black market or getting it to manageable levels has been the popularity of credit cards and electronic trading. Earlier, where there were notices in shops saying "Dont embarass us by giving a cheque", now there are "Credit Cards accepted" all over. Ditto for electronic trading. Once it becomes popular at trader levels ( and getting traders to use credit cards is difficult with their credit periods etc., but it can be done with some creative ideas. Say a credit card that pays itself after 30 days ( or 60 or 90) to the party with some creative ideas would turn out to be a money spinner.), I think we will be there some day.

What if all the black money gets into the system? What will happen? For one, our GDP, productivity levels, real incomes will be up by a few percentage points.The biggest advantage will be that more people will pay tax which could, in theory, lead to lower taxes all around.

3 comments:

Anonymous said...

use credit cards, it will delete the black market economy in one shot.

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Daniela said...

Interesting post. I have been wondering about this issue,so thanks for posting. I’ll likely be coming back to your blog. Keep up great writing.

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