Operation Clean Money

Enforcement not enough, tax reforms too needed

Last week, Prime Minister Narendra Modi held a meeting with senior officials of the Union revenue department. The message he sent out to them was unexceptionable: Implement Operation Clean Money, a campaign to tackle the black money menace. There has never been any doubt in anyone’s mind that illicit money created largely through tax evasion and money laundering has for long been a bane in this country. So, it was only to be expected that Mr Modi while addressing revenue department officials would lay emphasis on the need for speedy action to prevent tax evasion, underline the obvious benefits from the imminent rollout of the goods and services tax (GST), and reiterate the government’s resolve to enforce the Benami Transactions (Prohibition) Amendment Act, which was ratified only last year. The revenue department, it must be noted, has already stepped up its activities to detect cases of tax evasion and bring the guilty to book. Over 240 cases have been registered under the benami transactions law so far leading to, among other things, attachment of assets worth Rs 55 crore. It has also zeroed in on 60,000 cases where sales have been reported to be excessively in cash. Enforcement officials have detected undisclosed income worth over Rs 9,330 crore and, in addition, seized cash and valuables worth over Rs 800 crore.

These are positive signs of a government’s seriousness about its intent on rooting out black money. But at the same time, this approach needs to be tempered with some caution so that an excessive emphasis only on investigations and enforcement does not detract from the other equally important and necessary steps to strike at the root causes of black money. Effective enforcement or efficient investigation will be useful only up to a point. The detection of tax evasion cases or action against evaders will help unearth black money to some extent. These may even act as a deterrent against those who may contemplate engaging in such financial irregularities, although its effectiveness is diluted through frequent announcements of immunity schemes to give tax evaders a chance to come clean. A lot more, therefore, has to be done to eliminate the incentives for people to evade taxes.

To begin with, the government must renew its focus on a simple and stable tax regime with moderate rates. Here, the government’s overall intention must match the revenue department’s actual rules and their enforcement. For instance, the introduction of the General Anti-Avoidance Rules (GAAR) and the Place of Effective Management (PoEM) regime was expected to make India’s tax laws transparent, simple and non-discretionary. But India Inc has already begun entertaining serious misgivings over the way the rules for both GAAR and PoEM have been framed. Similarly, the GST has been framed with as many as five rates, giving rise to more discretion in fixing rates for various items and encouraging specific sectors of industry to lobby for a more favourable treatment. Even though an attempt has been made to bring down tax rates, the pace of phasing out exemptions has remained too slow for comfort. Lastly, the much-needed reform of tax administration to make the taxman friendly towards the taxpayer still remains an unrealised goal. Given that many expert committees have suggested a host of measures to achieve these goals, the government clearly is not short of ideas. All it needs is the will to implement them.