10/4/2017 Alternative to note ban to tackle black money

Alternative to note ban to

tackle black money
Business Standard · 2 Oct 2017 · SUKUMAR MUKHOPADHYAY The writer is member, Central Board
of Excise & Customs (retired) Email: smukher2000@yahoo.com

Several economists and critics have said demonetisation has not been a suc-
cess and, in any case, the same result expected to be achieved by demonetisation
could be achieved by other methods. None has discussed clearly what those are. I
am including in this discussion the most eloquent and famous ones. Namely,
Raghuram Rajan, Arun Kumar and Kaushik Basu. I am trying to put together the
alternatives they suggested directly or indirectly to achieve the same results as
demonetisation, from their writings, books and interviews.

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10/4/2017 Alternative to note ban to tackle black money

Rajan has not written anything on this in his book, I

do what I do, which I have read carefully. In interviews with several television
channels and newspapers, he has indicated “there were better ways of achieving
the same objective, without banning notes outright” ( Business
Standard, September 9, 2017). He has not indicated those better ways. Else-
where in a TV interview, he has mentioned over-invoicing by corporates should
be stopped to check black money. There are no details. He has also indicated a
goods and services tax (GST) would be a good way to check evasion. Kaushik
Basu has also said GST would be better than demonetisation. Arun Kumar has
written a book on black money and has written quite extensively on demonetisa-
tion but not indicated how an alternative could have succeeded better, though he
has asserted, “Black money needs to be tackled but demonetisation is not the
way.”
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So, these critics are excellent in their inimical interpretation of demonetisa-

tion but are not able to give an alternative. I shall deal with GST and over-invoic-
ing, which are specifically named, though not discussed.
The targets of demonetisation were (1) eliminating or reducing black money,
(2) removing counterfeit notes, (3) control the funding of terrorism, (4) increas-
ing of electronic transactions and (5) increasing tax compliance by getting more
taxpayers . The first three were mentioned in the initial period and the last ones
later, which the inimical critics called, "changing goalposts”. They did not con-
sider that subsidiary effects need not be mentioned at the first instance.
The target was not to tackle foreign holding of cash siphoned off from India
and stashed in tax havens, for which separate action is afoot. The target is also
not to tackle black wealth, such as hoarded gold or property bought from black
money. Arun Kumar has been constantly trumpeting that demonetisation has
not tackled black property. That was not a target. Given these targets, I shall dis-
cuss the alternatives, GST and checking of over-valuation. GST has already been
introduced and been hailed by Basu and Rajan. Rajan has said in his interview it
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would check evasion. Actually, GST is no guarantor of checking this. Side by side
with GST, cash transactions go on. In places where there is GST for long, such as
the European Union, Brazil, South Africa and Canada, taxpayers have evolved
methods for creating shell companies to evade tax (Fraud in VAT in EUVAT
Monitor Vol 15, No 3, 2004). Overvaluation by corporates has been mentioned
by Rajan without elaboration. Regarding over-invoicing of import, we must re-
member nearly 50 per cent of import is of oil and by government undertakings.
For the rest, there is a very little scope, as value comparisons are made with com-
parable prices by the valuation directorate established for this purpose.
Few cases by some shell companies can be made as a fraud, which is not sub-
stantial in quantity. The money is saved abroad, which is not black money in In-
dia. Over-invoicing of export in general is not practicable, as Indian goods are
not competitive in foreign markets. Even for drawback export, the valuation
directorate checks prices. They get caught. Rajan has not discussed the main
source of black money, which is direct tax and real estate. So, the suggested al-
ternatives would not achieve any of the five targets mentioned.
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10/4/2017 Alternative to note ban to tackle black money

In countries where there is GST for long, taxpayers have evolved methods for
creating shell companies to evade tax

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