In India Tax (and Regulatory) Terrorism Might Keep Black Money in Play

As India goes through the demonitisation process, there has been a lot of hope that digital payments would take off and everyday reliance on currency would go down. 

I was deeply impressed by the slow but definite adoption of digital transaction systems during my recent road trip through several rural areas of Northern India. Commerce seems a little dipped, but even the smallest of markets are still thriving with people. In small communities where everyone knows one another, trust systems built over the years keep commerce going. I had the opportunity to talk to a few vendors about their digital experiences, and most of them have expressed them as positive ones, after the expected initial starting hiccups.

A halwai (confectioner) even expressed pride in his brand new ‘digital money accepted’ sign and commented that it has increased his brand from a small-time rural shop to one that ’does the same thing as the big city, air-conditioned stores’. That said, however, most merchants are waiting for 30th December to come, the day when the entire exercise and curbs on cash withdrawals will be lifted. The sense is that they need to weather the storm, and, come 1st January, they can, for the most part, go back to business as usual.

The stickiness of using digital payments beyond 30th December is in question, and very few people have the answer. Can behaviours be changed in a few months? Is the experience of the digital world so fantastic that, once exposed, people will not go back? As my anecdotal conversations over the months before and since the demonitisation have indicated, the use of formal payment systems by large swathes of the economy has very little to do with transaction mechanisms and mostly to do with a regulatory system that actively incentivises consumers and merchants to leave the formal economy itself.

I initially wrote about this in an article published in The Week magazine a month ago, and I argued that the government needs to incentivise micro and small businesses to enter the formal economy. The worries of most small shopkeepers and businesses people were less to do with the amount of income tax they would have to pay, and more focussed on the huge costs of compliance, partly related to the forms and submission, but even more so related to the harassment they face by a slew of inspectors.

The major worry for them is that, once they step into the formal economy, by either accepting digital payments or by even formally registering their businesses, they will be ‘on the radar’ for a number of compliance officers and be shaken down. This could range from labour, excise and sales tax inspectors to municipal authorities and even income tax officers. An owner of a small tailoring shop who refuses to give proper receipts told me, ‘I need to pay them off regularly. If I declare income, I will have to continue to pay them off, pay more tax, and then deal with their friends in other departments’.

Almost everyone I spoke to has a friend or close relative, if not themselves, who had at some point been shaken down for a bribe, and usually for many more. They told me harrowing tales of officials barging into homes, ransacking their belongings, pocketing items sometimes, and then confiscating even their wife’s jewellery, demanding bribes and then leaving them to navigate a complex and corrupt system to get back some of their belongings. If they file their income tax returns properly, they fear they will not only be putting a larger target on their back, but also that the attitudes of the inspectors would clearly be that they can afford to pay more and should be squeezed.

As much as these businesspeople feel helpless in the face of demonetisation, it is nothing compared to the helplessness they feel in the face of government machinery that, at the highest levels, wants to support them, but on the ground has extortionist tendencies.

I have campaigned for people to stop mixing ‘tax not paid income’ and ‘illegal income’ into a single term. One is tax-evaded money, the other corrupt money. The common man sees black money as corrupt money, while economists and bureaucrats seem to view black money as tax-evaded money. Dealing with the two requires very different methods, although demonetisation has initially affected both.

The large swathes of support being shown for the demonetisation is not for tax-evaded money (see my article: ‘Indian People Discover Maximum Black Money in Their Own Pockets’) – it is for corrupt money, and the government would do well to keep reminding themselves of this fact.

The stated goal of the government, RBI and our Prime Minister has been to move away from a cash economy for the benefit of the country. On public record, they have said (and I agree) that fewer cash transactions would bring down everything, from corruption to crime and even the risk of cross-border terrorism. I am a strong supporter of any and all efforts by them in this regard.

That said, however, most of these efforts will go to waste unless the government is able to restore the confidence of the common man, and common business man, via the regulatory and tax machinery of the country. Without this, no matter how many shocks there are to the system, people will use the black money economy as their first, rather than last, resort.

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