Here is More Evidence on India’s Love for Black Money


In the budget speech made on February 28, 2013, the then finance minister P Chidambaram had said: “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.”

This statement caused a lot of hungama at that point of time. Recently, the revenue secretary Hasmukh Adhia made a similar sort of statement. “There are only 1.5 lakh individuals whose total income would be above Rs 50 lakh,” Adhia recently remarked.

This statement by Adhia has been largely ignored. It essentially implies two things: a) India is a poor country where very few people actually earn more than Rs 50 lakh. b) Very few Indians actually pay income tax and black money forms a major part of the Indian economy. Black money is money which has been earned, but on which tax has not been paid. While, there is no denying that India is a poor country, in this context the second option makes more sense.

In a country of close to 125 crore people, only 1.5 lakh individuals, or 0.012% of the population has an income of over Rs 50 lakh. This is a tad difficult to believe. The consumption patterns clearly prove otherwise.

One argument that can be made here is that many people earning over Rs 50 lakh are making money in forms that are tax-free, like capital gains and dividends from stocks. Dividend earned from stocks has been tax-free for a while now. In the budget presented in February earlier this year, the finance minister Arun Jaitley introduced a “tax at the rate of 10% of gross amount of dividend…payable by the recipients, that is, individuals, HUFs and firms receiving dividend in excess of Rs 10 lakh per annum.” (HUFs = Hindu Undivided Families).

While Chidambaram had used the phrase “taxable income”, Adhia just used the term “income”. So in Chidambaram’s case it is clear he meant that only 42,800 Indians had a taxable income of more than Rs 1 crore. Hence, there are more than 42,800 Indians making more than Rs 1 crore per year. This would include those who make money through capital gains and dividends from stocks, on which taxes need not be paid.

In Adhia’s case, he has just used the term “income”. Hence, the 1.5 lakh individuals who make more than Rs 50 lakh per year, would also include those who make money in forms, on which income tax does not have to be paid. It also includes those who make more than Rs 50 lakh per year, but whose taxable income is less than Rs 50 lakh, given that they make use of various deductions that are available.

Adhia’s statement was made in a certain context. In a notification put out on April 1, 2016, the ministry of finance had said: “With Assessment Year 2016-17, individuals and HUFs filing their returns of income in ITR-1, ITR-2, ITR-2A and ITR-4S, having income exceeding Rs.50 lakh will now be required to furnish information regarding assets and liabilities in Schedule-AL of the relevant ITR form.”

Basically those earning more than Rs 50 lakh would now have to declare their assets (cars, investments, property etc.) as well as liabilities (like loans being re-paid) while filing their income tax returns.

There were some protests against this move, which led Adhia to state that: “There are only 1.5 lakh individuals whose total income would be above Rs 50 lakh. This schedule in ITR only applies to ultra rich and will not affect the common man… 99.5 per cent taxpayers are not affected by this requirement. Only the ultra rich will have to give this information in their I-T Returns.”

On the face of it, this seems like another move on the part of the Narendra Modi government to crackdown on black money. While this might look like another move to tackle black money, to me it seems more like a classic bureaucratic exercise to harass those who are already paying income tax and following the law of the land.

The number 1.5 lakh is anyway so small that this lot of people is probably not in a position to hide its income given that most of it is tax deducted at source(TDS). Chances are that these individuals are either salaried and/or honest.

Hence, what is the point in making their income tax filings more complicated than it currently is? Is the chartered accountant(CA) lobby at work? Is it trying to ensure that filing income tax returns gets more complicated by the year, leading to more CAs being able to charge more?

I really don’t have answers for that. But in a country where conspiracy theories thrive, this one makes immense sense.

Also, from April 1, 2016, onwards, many high value transactions are to be reported to the income tax department.

These include: a) buying or selling of immovable property worth more than Rs 30 lakh. b) purchase of shares worth more than Rs 1 lakh or mutual funds worth more than Rs 2 lakh. c) payment of credit card bills more than Rs 2 lakh. d) investment of more than Rs 1 lakh in gold ETFs. e) investment of Rs 5 lakh or more in debentures or bonds of a company. f) cash deposit of more than Rs 10 lakh made into a savings bank account.

Hence, the government will have access to most of the information that it now wants from those earning more than Rs 50 lakh to declare in their income tax returns. Why is it still asking for this information? One possible explanation is that given the slow pace at which our bureaucracy works, the expectation is that this information will not be shared with the income tax department at a fast pace or on a regular basis. Hence, the department now wants the information coming to it directly. Again, I don’t have any evidence for this, but it makes for a good conspiracy theory.

Also, the moot question is what is the government doing to expand the tax base? Is it looking at the right places for people and institutions which are avoiding to pay income tax? Take the recent data on money supply released by the Reserve Bank of India.

Between March 2015 and March 2016, the currency with the public went up by 15% or Rs 2.08 lakh crore. Between March 2014 and March 2015, the jump had been 10.6% or Rs 1.33 lakh crore. So why this sudden jump?

The RBI governor Raghuram Rajan explained this in an interaction with the media after presenting the first monetary policy statement for this financial year on April 5. He explained that assembly elections are currently on in several states. Around this time, the cash in hands of the public increases.

As Rajan said: “you can guess as to reasons why…we also guess.” This increase is not only in the states that go to elections but also in neighbouring states. Having said that, this explains only a part of the increase.

This money that has gone out of the banking system to finance elections, is very easy to track. The income tax department can easily check if tax has been paid on this income. Typically, black money finances elections. But given that this money is financing assembly elections, and politicians are involved, the chances of anything like this happening are remote.

The column originally appeared on Vivek Kaul’s  Diary on April 7, 2016