Arun Jaitley

This Govt Company Lost Rs 11.65 Crore Per Employee, and It’s Not Air India

Hindustan photo

The finance and defence minister Arun Jaitley, recently said: “India has a historic second chance, after nearly one-and-a-half decades, to disinvest in state-owned Air India Ltd and help propel the growth of aviation sector.”

Whether this happens remains to be seen given that the issue of disinvestment of Air India is a political hot potato, and any movement on this front is likely to lead to a lot of hungama, for the lack of a better word, from India’s professional trade union leaders, as well as the opposition parties, which have been in a rather moribund state of late.

Over and above this, the Modi government hasn’t really come up with any economic reform till date, which is likely to make it unpopular with a section of the population. The unpopular steps have typically been reserved to drive the so called cultural agenda of the Rashtriya Swayemsevak Sangh (RSS) and the Bhartiya Janata Party (BJP).

Having said that, before the government goes about disinvesting Air India there are several low hanging fruits that it can pluck, and save a lot of money in the process. One such company is the Hindustan Photo Films Manufacturing Co. Ltd. Take a look at Table 1.

Table 1: 10 Major Loss Making CPSEs during 2015-16 

As per Table 1, Hindustan Photo Films was the fourth largest loss maker among all public sector enterprises in 2015-2016. It made a loss of around Rs 2,528 crore. The three companies that made greater losses than Hindustan Photo, had some semblance of a business, though not a business model. The Steel Authority of India Ltd has steel plants all over the country and employs thousands of people, though it lost a lot of money in doing so, given that it can’t compete with the Chinese steel on the price front.

The Bharat Sanchar Nigam Ltd, offers telecom services across the country. And Air India, for whatever it is worth, is India’s national airline and flies people globally as well as locally. It also flies the prime minister whenever he takes an international trip.

But what about Hindustan Photo Films? What does the company do? Photo films went out of business a while back. The question is: Why is the government still running a photo film company? The photo film was killed first by the digital camera and then by the mobile phone. Actually, the company doesn’t make photo films any more.

During 2012-2013 (the latest annual report that I could find), the total production of the company had stood at Rs. 3.6 crore. The sales had stood at Rs. 3.7 crore. Now imagine who in their right minds would run a company with sales of under Rs. 4 crore and which ends up with losses of more than Rs. 1,500 crore, as it did during the course of 2012-2013. As mentioned earlier in 2015-2016, the company lost Rs 2,528 crore. It employed 217 individuals. This meant a loss of Rs 11.65 crore per employee. This number shows the ridiculousness of the entire exercise of keeping the company alive.

In fact, 2015-2016 wasn’t the first time that Hindustan Photo Films lost money. It has been losing money for over a decade. Between 2004-2005 and 2015-2016, the company has lost close to Rs 15,000 crore in total.

Table 2: Losses of Hindustan Photo Films 

As is clear from Table 2, the company hasn’t made any money in years. Given this, in order to continue to operate the company has borrowed money. As of March 31, 2016, the total long-term loans of the company stood at Rs 23,752 crore. Servicing these loans by paying interest on them, I guess is the major expense of the company now. I say guess because I don’t have access to the latest annual report of the company.

Banks keep giving loans to a dud company like Hindustan Photo Films because they know that they are ultimately lending to the central government, and what can be a more safer form of lending.

It is worth pointing out here that the government does not have an unlimited amount of money. Every rupee that goes towards funding the losses of companies like Hindustan Photo Films, is money that does not go towards more important things like education, health, or affordable housing, for that matter.

Also, a normal excuse offered on keeping a loss-making public sector enterprise going is that so many people are employed. Over and above the direct employment, there is a certain ecosystem that the public sector enterprise feeds into and helps that ecosystem as well. But in this case, this logic fails given that there are only 217 employees. They can be given a good voluntary retirement package and the company can be shutdown. Also, the physical assets of the company can be sold to repay the debt that has been accumulated. For starters, the company has 472 constructed homes in its township.

This is low hanging fruit that the Modi government can easily cash in on, if it wants to. Why this hasn’t happened up until now, on that your guess is as good as mine.

The column originally appeared on Equitymaster on May 30, 2017.

Of “Shaky” Demonetisation Statistics, Arun Jaitley and Black Money

We don’t live in a perfect world. And given this, governments like to showcase the positive impact of the decisions they make, all the time. Sometimes, they get very desperate in the process.

Take the case of the economic impact of demonetisation. Most data now coming out clearly shows that the decision did not have a positive impact on the Indian economy. It might have helped the Bhartiya Janata Party to win the Uttar Pradesh assembly elections, but that doesn’t necessarily make it a right decision on the economic front.

Nevertheless, the Modi government would like us to believe that demonetisation has helped the country on the economic front. Early last week the finance minister Arun Jaitley said that “more than 91 lakh people were added to the tax base due the result of the actions taken by the income tax department.”

It was later clarified that 91 lakh people were added to the tax base in 2016-2017(i.e. between April 1, 2016 and March 31, 2017). As per Jaitley’s statement 91 lakh individuals were added to the tax base post demonetisation, which is incorrect.

Meenakshi Goswami, Income Tax Commissioner and the official spokesperson of the Central Board for Direct Taxes (CBDT), told NDTV later in the week that “91 lakh was the total number of new taxpayers enrolled in the financial year 2016-2017.”

Now this makes things interesting. On the face of it, the addition of 91 lakh individuals to the income tax base sounds like a huge number. But when we are talking about any increase or decrease, a number should never be viewed in isolation.

The trouble is that we don’t have long term data on this front because of a change in the definition of “tax base” and “new tax payer added during the year”. The annual report of the ministry of finance for 2015-2016 points out that new taxpayers “added during the year 2014-15 is 76,04,154”. This basically means that 76 lakh new taxpayers were added during 2014-2015. I couldn’t find any data for 2015-2016. Now compare the 91 lakh additions in 2016-2017 to 76 lakh additions in 2014-2015, and suddenly the number doesn’t seem too high, given that no demonetisation was carried out in 2014-2015.

Even if the government doesn’t do anything, taxpayers get added every year, especially when the minimum tax slab continues to remain the same. In 2014-2015, the minimum tax slab was Rs 2,50,000, which is where it continues to be. This basically means that inflation alone would have ensured that more people came into the tax bracket and thus increased the tax base.

Over and above this, as the economy grows and people earn more, more people come into the tax bracket.

Once we take these factors into account, the addition of 91 lakh taxpayers suddenly doesn’t sound much, especially taking into account the disruption that demonetisation caused through the length and the breadth of the country.

Further, Sushil Chandra, chairman of CBDT said that between November 2016 and March 2017, the search actions of the income tax department revealed an undisclosed income of Rs 16,398 crore. On the other hand, the surveys had led to a detection of Rs 6,746 crore during the same period.

Again, if we look at these numbers in isolation, they sound like a lot of money. But that doesn’t turn out to be the case if we look at numbers over a period of time. Take a look at Table 1. It shows the undisclosed income admitted to and detected during the search operations as well as surveys conducted by the income tax department over the last few years.

Table 1: Undisclosed income

Financial YearNumber of groups searchedUndisclosed income admitted (in Rs Crore)Number of surveys conductedUndisclosed income detected (in Rs Crore)Total undisclosed income (in Rs Crore)
2012-201342210,291.61463019,337.4629,629.07
2013-201456910,791.63532790,390.711,01,182.34
2014-201554510,288.05503512,820.3323,108.38
2015-1644511,066.2444229,654.820,721.04
2016-17*2226,304.7197717,62.518,067.22

*Up to September 2016 in case of search numbers and August 2016 in case of survey numbers
Source: Ministry of Finance Annual Reports and the Press Information BureauThe numbers for 2016-2017 are incomplete. But there is enough detail that lets us analyse the issue. Between April and September 2016, the total undisclosed income (or black money) admitted through search operations of the income tax department stood at Rs 6,304.71 crore. The undisclosed income detected through surveys conducted between April and August 2016 had stood at Rs 1,762.51 crore. If we add these numbers we get Rs 8,067.22 crore.

Between November 2016 and March 2017, the search actions of the income tax department revealed an undisclosed income of Rs 16,398 crore, as pointed out earlier. On the other hand, the surveys had led to a detection of Rs 6,746 crore during the same period. Adding both these numbers we get Rs 23,144 crore. Adding this to the earlier Rs 8,067.22 crore, we get around Rs 31, 211 crore.

This is the total undisclosed income identified by the income tax department during the course of 2016-2017. The number is incomplete because the information for the month of October 2016 is missing in case of search operations and information for the months of September-October 2016 is missing in case of survey operations.

Nonetheless, it is a good ballpark number to work with. Hence, the total amount of undisclosed income or black money identified by the income tax department in 2016-2017 stood at more than Rs 31,211 crore.

Is it such a big deal? Look at Table 1. The total amount in 2012-2013 had stood at Rs 29,629 crore. This amount hasn’t been adjusted for inflation. It is safe to say that in inflation adjusted terms more undisclosed income was identified by the income tax department in 2012-2013 than in 2016-2017. In 2013-2014, the number stood at Rs 1,01,182 crore, which is significantly more than 2016-2017. And it is worth remembering here that these numbers happened without demonetisation. In fact, as the numbers clearly show the efficacy of the income tax department when it comes to identification of black money has come down since 2014-2015.

To conclude, the rosy picture of demonetisation that the government is trying to paint, is really not true. The more data we look at the clearer this becomes.

Postscript: I recently did a podcast with the writer Amit Varma who is currently the editor of the Pragati magazine, on the Right to Education and how it has screwed up our education system. Most of what I spoke was based on my new book India’s Big Government—The Intrusive State and How It is Hurting Us. You can listen to the podcast here.

The column originally appeared in Equitymaster on May 22, 2017.

Of Section 269ST and Black Money-The More Things Change, the More They Remain the Same

In the budget speech made on February 1, 2017, the finance minister Arun Jaitley had said: “The Special Investigation Team (SIT) set up by the Government for black money has suggested that no transaction above Rs 3 lakh should be permitted in cash. The Government has decided to accept this proposal.” Black money is basically money earned through legal or illegal means but on which tax has not been paid.

In the Finance Bill (which is what the budget is) that was finally passed on March 30, 2017, this limit was reduced to Rs 2 lakh. This has led to the addition of Section 269 ST in the Income Tax Act. This is how the Section 269 ST reads: “No person shall receive an amount of two lakh rupees or more— (a) in aggregate from a person in a day; or (b) in respect of a single transaction; (c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account.”

Basically, the introduction of Section 269ST into the Income Tax Act does not allow transactions of greater than Rs 2 lakh in value to be carried out in cash. On the face of it, like many other government moves in the past, this seems like a good move. Indeed, this seems like a move with noble intentions given that it intends to move people towards digital transactions. And as people move towards digital transactions, the number of transactions carried out in black will come down.

In fact, the history of the Indian government (and I don’t just mean the current one) is littered with examples of decisions carried out with noble intentions. But in the end these decisions either do not make a material difference or go against the people they are supposed to benefit. Much of my new book India’s Big Government—The Intrusive State and How It is Hurting Us deals with this basic issue.

Getting back to the issue at hand. What does the Rs 2 lakh limit on cash transactions really mean? You cannot receive more than Rs 2 lakh in cash from a single person in cash in a day. So, if you receive Rs 3 lakh from the same person during a single day, even for two or more different transactions, then a penalty will be levied on you.

As the newly inserted Section 271DA of the Income Tax Act points out: “If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt.” This basically means that in the above example, the penalty shall work out to Rs 3 lakh.

Further, the penalty shall also apply in other situations. Let’s say there’s a single transaction of Rs 3 lakh and cash payments are made on three different days. Even in this case, the receiver of the payment will be liable to pay a penalty.

The third situation is the most tricky of the lot. It limits cash payments of greater than Rs 2 lakh relating to one event or occasion from a person. The words event and occasion have not been defined.  Now let’s consider a marriage. In case of a marriage, this would mean that any payment of more than Rs 2 lakh in cash cannot be made to one of the suppliers. If such a payment is made, then the suppler is liable to pay a penalty.

One could also interpret this section with regard to cash gifts that are received during the course of a wedding. One interpretation of this can possibly be that a cash gift of more than Rs 2 lakh cannot be received from a single person. This would also include gifts from “relatives” as defined by the Income Tax Act, who are allowed to gift any amount of money.

So far so good. As I said the intentions are very noble indeed. Nevertheless, the first question is how will the government and more specifically the Income Tax department figure out that cash transactions of greater than Rs 2 lakh are taking place? Typically, such large cash transactions are carried out only if the two parties do not want the government to know about it, and in the process avoid paying tax on the transaction.

How does Section 269ST change that in anyway? Let’s say you go to buy a luxury good which costs more than Rs 2 lakh. The shopkeeper may not want to take cash for an amount greater than Rs 2 lakh. Then the Section 269ST becomes fully useful. But one always has the option to go over to another shopkeeper who is willing to accept cash and fudge his books of account. My point is that this new section will not have a major impact on black money in India, its noble intentions notwithstanding.

Also, the Section 269ST and or any other move of the government, doesn’t do anything regarding the demand for cash as a form of payment. This was and continues to remain the main problem when it comes to black money. Take the case a real estate builder. If you want to buy a flat, the builder will more likely than not demand cash from you. What will you do in such a situation? Tell him that under Section 269ST he is liable to pay a penalty if he receives a payment of greater than Rs 2 lakh?

Why does a builder take a portion of the payment when he sells a flat or a house, in cash? I think it is very important to understand this. He takes a payment in cash because he needs to make payments in cash. He needs to pay his suppliers in cash. But more importantly he needs to pay politicians and bureaucrats in cash.

Unless a builder has politicians and bureaucrats in his pocket, it is very difficult for him or her to be in the business of real estate, given how complicated the regulations governing the sector are. The speed money paid to politicians and bureaucrats essentially helps builders stay in the game. And this speed money cannot be paid in cheque or through NEFT/RTGS/IMPS and so on. It has to be paid in cash.

And this cash can only come from the buyer who is buying the flat or the homes that the builder has built. Unless this nexus between politicians and builders is struck down, the government can keep coming up with all the new sections and all the new changes, the demand for cash is not going to go anywhere.

As I keep saying, this can only happen if the system of electoral financing in India is cleaned up. Given the high cost of elections in India, the politicians need cash. And the builders and the corporates provide this cash. And there is nothing that the government has done on this front till date.

The column originally appeared in Equitymaster on April 6, 2017

The Bolbachan of Cleaning Up Black Money in India

One of the issues that I have often written about in the Diary is black money.  And I honestly feel that the total amount of black money going around in India will come down only once the electoral funding of political parties is cleaned up. This is an issue I have been talking about for a while now, and I first started writing about it even before notebandi happened, and the issue wasn’t fashionable enough.

Unless electoral funding of political parties is cleaned up, the other steps taken are what we in Mumbai lingo call bolbachan. Simply translated this means just plain talk and nothing else.

In the budget (or the annual Finance Bill of the government) presented on February 1, 2017, a few amendments which were supposed to clean up electoral funding of political parties, had been proposed.

Over and above these steps, a few other amendments were introduced as a part of the Finance Bill for 2017. The Bill was finally passed a few days back on March 30, 2017. These amendments along with the steps proposed earlier at that point of time when the budget was presented, essentially make sure that the Indian electoral finance system will continue to remain as opaque as it was. Or to put it simply, we went one step forward and two steps back at the same time.

Let’s examine the issues one by one.

a) One of the steps proposed in the budget was that the “maximum amount of cash donation that a political party can receive will be Rs 2,000/- from one person.” Earlier, this limit was Rs 20,000. Further, the political party did not have to declare the names of people contributing up to Rs 20,000.

The total amount of cash donation that a political party can receive has been lowered to Rs 2,000. This means political parties can still receive donations in cash. This basically means that the black money can still be channelised into electoral donations. Of course, all this has done is increase paper work. Instead of one receipt of lower than Rs 20,000 that used to be made earlier, multiple receipts of less than Rs 2,000 will now have to be made, to get around to the current rule.

As C Rammanohar Reddy writes in Demonetisation and Black Money: “The practice so far has been to split up large collections of black money into individual donations, each less than Rs 20,000 so that the anonymity of the source is maintained. The new rule only makes this more difficult; it does not prevent it… The Rs 2,000 rule will continue to keep the door open for black money.”

Some of you might feel that I am being sceptical here, but what else can one be regarding Indian political parties. Interestingly, while the cash donation limit has been reduced to Rs 2,000, political parties still don’t have to disclose the names of people donating of up to Rs 20,000.

As Milan Vaishnav the author of  When Crime Pays: Money and Muscle in Indian Politics pointed out in a recent column: “While the government has lowered the cash limit to Rs. 2,000, it has not touched the disclosure threshold, which remains at Rs 20,000. Politicians are already privately joking that the new cash cap will easily be gamed; the only difference is that their chartered accounts will demand a raise.”

This is the point I had made about bolbachan—just talk without any concrete steps that are likely to make a material difference. On the face of it, this seems like a move which basically makes sure that any donation of greater than Rs 2,000 made to a political party will have to made through the banking system. But as mentioned earlier, the donation can easily be split into multiple transactions and black money can continue to finance political parties.

b) In his budget speech, the finance minister Arun Jaitley had introduced the concept of electoral bonds. As he had said: “An amendment is being proposed to the Reserve Bank of India Act to enable the issuance of electoral bonds in accordance with a scheme that the Government of India would frame in this regard. Under this scheme, a donor could purchase bonds from authorised banks against cheque and digital payments only. They shall be redeemable only in the designated account of a registered political party.”

The proposed electoral bond is a bearer bond. As Reddy points out: “It would seem that the idea is for the RBI to issue electoral bonds, which individuals/organisations can purchase at banks (by cheque, thus keeping out unaccounted cash). The buyers can donate these bonds to political parties, which can deposit them only into their bank accounts. Because they are bearer bonds the banks will know the identity of the buyer, but the political parties receiving them would not know who the donor is. This opacity about the donor may free the political party from returning favours. However, the interests of transparency are not met by such features. In any case, which donor would not want his identity to be known to the recipient political party?”

Interestingly, the Wall Street Journal points out that the bearer bonds were phased out in the  United States, in the 1980s “because they are anonymous and easily used by money launderers and tax evaders.”

And this precisely what the electoral bonds will encourage in India as well, as we shall see.

Getting back to the point, the electoral bonds seem to move things above board. Hence, instead of donating cash to a political party, a donor can now use the banking system.

The trouble is this that the electoral bonds need to be seen together with other amendments which were introduced towards the end and were not originally a part of the Finance Bill.

c) So, corporates can now donate money to political parties using electoral bonds and maintain secrecy. But that is just one part of it. Earlier, a company could donate up to 7.5 per cent of the average net profit for the last three years to political parties. Further, the company had to disclose the total amount of donations made to political parties in its profit and loss account. It also needed to disclose the names of the political parties it had donated money to.

The recently passed Finance Bill of 2017 does away with these needs. What does this basically mean? It essentially means that a company can donate any amount of money to a political party without the company or the political party having to disclose it. And this, in a country like India, where the governance mechanisms are shaky, makes for a deadly combination.

This is precisely the fear that led to the phasing out of bearer bonds in the United States. As Reddy writes: “The donor’s books will only record that bonds have been bought, they will not record who the bonds have been donated to. The political party receiving the bonds will record receipt of the bonds but the identity of the benefactor will not be known. This is the perfect cover of the anonymity for pay-offs to take place. It would seem that the business-politics links are going to be strengthened and not weakened with such ‘reform’.”

As a senior CAG official told The Telegraph: “This means, for example, that an infrastructure firm could theoretically pay up to 50 per cent of its net profits to a single party as donation without anyone getting wiser as to which party has been paid… this throws open the possibility that an order to build a highway or a railway bridge could be given to a firm and that firm could pay the donation to the party in power which placed the order with it… The beauty is that if this happens, it will be legitimate and no questions can be asked by any ethics committee of Parliament or by any CAG audit.”

To cut a long story short, these changes will take the corporate-politico nexus to altogether another level. We have seen in the past how the nexus has messed both the real estate and the banking sector in India. It remains to be seen how the consequences of this year’s changes in the Finance Bill pan out.

Of course, while the political parties can continue to be opaque and non-transparent, come July 1, 2017, all income tax payees will compulsorily need to quote their Aadhaar number while filing their income tax returns.

Welcome to the new India. As I said earlier, it’s all about bolbachan.

The column originally appeared on Equitymaster on April 4, 2017

Mr Jaitley, Informal Economy Doesn’t Necessarily Mean Black Economy

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

The finance minister Arun Jaitley has been at the forefront in trying to defend the demonetisation or notebandi decision of the Modi government.

He recently said in London: “Demonetisation was a move to change the Indian normal… a new normal had to be created. A predominantly cash economy has now to be substituted with a digital economy, which will bring more money into the banking system and lead to better revenue generation; the integration of the informal economy with the more formal one is now taking place… The post-demonetisation regime is actually going to generate a far bigger GDP in the long run.” He also said that the arguments being made in favour of the cash economy were absolutely trivial.

There is much that is wrong with the above statement, but in this column, I would like to just concentrate on the part that I have marked in red in the above paragraph. Before we get into anything else it is important to define the meaning of the term “informal economy”. Here is a basic definition. It is that part of the economy which is not really monitored by the government and hence, it is not taxed. But there are several nuances to this as well, which we shall see during the course of this column.

In Jaitley’s binary world, the formal economy is good because it brings in tax to the government, and the informal economy is bad, because it does not bring in tax to the government. Demonetisation has managed to create a cash shortage which Jaitley believes will force a large section of the informal economy to move towards becoming formal and allow the government to tax them.

The trouble is economics is never so straightforward. As economist Jim Walker of Asianomics wrote in a research note: “There is nothing intrinsic that says that the informal economy is a less effective or beneficial source of activity than the formal economy.” Allow me to elaborate on this.

Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital wrote in a recent research note: “India’s informal sector is large and labour-intensive. The informal sector accounts for ~40% of India’s GDP and employs close to ~75% of the Indian labour force.” The point is that the informal sector forms a significant portion of India’s economy and employs three fourths of India’s workforce. There are other estimates which say that the informal sector employs more than 75 per cent of India’s workforce.

Hence, notebandi has ended up disturbing 75 per cent or more of India’s labour force. The cash crunch that has followed has severely disrupted the informal sector. As Mukherjee and Shekhar write in a recent research note: “Panipat in Haryana is the textile hub of North India. It is a ~Rs 31,000 crore industry with Rs 60,000 crore worth of goods being exported. It employs ~350,000 labourers. Whilst our interviews suggested that the export-focused units were largely unaffected, the domestic component of the industry saw business fall by 40-80% as this component of the business is more cash-reliant. As a result, almost half of the 350,000 labourers employed in the region have been temporarily laid off as demand has collapsed in the domestic market and there is no cash to pay the wages.” Similarly, in Tirupur, another textile hub, “the units are running only three days a week (compared to 7 days before demonetisation) due to the lack of demand,” the analysts point out.

This is something that cannot and should not be taken lightly. Jaitley in his London speech said that notebandi will lead to better revenue generation for the government. This means that the government will end up collecting more taxes.

The assumption here is that informal sector does not pay taxes. This is not totally correct. As I said the argument is slightly more nuanced than this. As I write in my new book India’s Big Government-The Intrusive State and How It is Hurting Us: “The National Manufacturing Policy of 2011 estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people. This means that any SME, on an average, employed 2.27 individuals. The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals.”

What this clearly tells us is that the size of an average Indian SME is small, in fact, very small and it is a part of the informal sector. They employ around 2.2-2.3 individuals on an average. These firms basically employ the owner and one more person, on an average. Interestingly, nearly two-thirds of these firms are own-account enterprises without any hired workers.

The contention is that these people who are a part of the informal economy do not pay any taxes, this includes income tax. The question is do they need to pay an income tax? Let’s look at some data. Take a look at Figure 1. It shows the money being made by different categories of people.

Figure 1: 

Take a look at the self-employed (remember two-thirds of small and medium enterprises in India are own-account enterprises without any hired workers). 96 per cent of self-employed earn an income of up to Rs 2,40,000 per year. Individuals come under the tax bracket only if they earn more than Rs 2,50,000 lakh per year.

Almost 100 per cent of the casual labour which works in the informal sector earns an income of up to Rs 2,40,000 per year. Hence, a major part of the individuals who work in the informal sector do not need to pay income tax. Given this, even if the government was in a position to collect income tax from these individuals, it wouldn’t be able to do so. The point being informal economy does not necessarily mean black economy.

Also, it is worth mentioning here that when these individuals who form a bulk of the informal economy spend the money they earn, they do pay indirect taxes which are built into the products being sold. Over and above this, the money they spend is an income for companies and individuals who are a part of the formal economy and pay income tax. Long story short-the situation is not as simplistic as Jaitley wants us to believe.

Having said this, it does not mean that the entire informal sector is kosher. There are individuals and enterprises who need to pay tax but they aren’t. It is these individuals and enterprises that the income tax department should be going after.

Also, more revenue for the government and going cashless doesn’t necessarily mean a good thing. As Walker puts it: “There is every reason to worry about the fact that moves towards a cashless economy will benefit banks (transactions cost) and governments (more taxes). The apologists for demonetisation were keen on the fact that it might prove to be an easier way for government to collect revenues. Governments come and governments go and one thing is for sure, they do not all spend money wisely. Giving them more access to individuals’ money is demonstrably not unequivocally a ‘good thing’.”

And that is something worth thinking about.

The column originally appeared on Equitymaster on March 2, 2017