India scraps its two largest rupee notes in shocking anti-corruption move

As we had often come back to discussing economic benefits/impact of sports I thought it was about time for an economic discussion forum.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 » Wed Sep 06, 2017 2:01 am

Jay, with all due respect, they are paying 0 now. So, pragmatism says something is better than nothing. Whether that creates a moral hazard for the future and what impact it will have is something that needs to be thought of carefully. And, why will they pay say even 15%? I don't know but whenever there has been amnesties at lower rates, then some black money comes out. Maybe people are tired of hiding and think that paying a small amount to launder the money is better. Game theoretically, if you have black money there is some probability of you getting caught. If the expected returns after accounting for the probability of getting caught and the fines/cost-assigned-to-jail-sentences is less than the expected return after paying 15%, then people will pay the 15%. The incentive to cheat goes down.

I did not go ticket-less, but, I did the calculation once. If you take the train, the fine was 50 Rs. at that time for ticketless travel. I kept track of how many times I was being checked. I took the train everyday for some time. It turned out that paying the fine whenever I was checked was more profitable than buying the ticket for every journey. If you do not have moral compunctions, you would think that the government was giving you two options, buy the ticket or pay the fine. The latter option made financial sense. I did not just feel right not to buy the ticket and anyway my dad was paying :-) But, if the ticket price went down, it may have made sense then to buy the ticket and not pay the fine. The same is the case wrt taxes.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Wed Sep 06, 2017 4:15 am

Not a moral issue. Just a practical issue. I don't think an income tax amnesty can be given at a lower rate than the standard income tax rate. Has any country ever tried that? I don't think so. It will be stopped as unconstitutional in any decent democracy, by the courts. The moment anybody declares he has X amount of money, the tax has to be paid, as per every country's laws. Because others have paid for thir past income. Even saying that "okay, all income next year for everybody is taxed at 10%; and you cheats with old money also pay 10%" won't work, because the regular citizens will file lawsuits saying they were asked to pay higher rates in the past and that these cheats should be asked to pay at the highest rate in the past years, if they can't show when they earned it (to use the rate that time). Just a straight matter of fairness. Not a moral issue. A no-brainer for the courts to step in.

Of course, if you say "all honest income next year is taxed at 10%, along with the cheats' black money", you will get less tax revenue in the bargain anyway!

It is not possible. You have to ask for the standard rate for any tax amnesty. The only leeway is in the penalties/fines. If you are asking for standard tax, then the cheats will stick with what they have been doing, except the ones who know that the government is suddenly serious on the enforcement and that there are easy paper-trails that will get to them. A majority of cash black money in India is of the kind where there is no trail with which to catch the cheats (like in under-reported property sales values, and bribes). Those cheats will not budge, as they knew all along why they weren't budging, and nothing would have changed from an amnesty program.

Am I missing something?

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by Mugundan » Wed Sep 06, 2017 11:09 am

jayakris wrote:
Wed Sep 06, 2017 1:36 am
Mugu, is that a different case than what prasen said above (low tax rates on an amnesty) which I explained to him as not possible nor productive, in my opinion. How can we tax people who legitimately made say 4 lakhs (who probably had that tax withdrawn from their salary), and not those who simply showed 4 lakhs under your program? The standard income tax rate has to be an absolute minimum on any amnesty. That means it is no different than the cheats deciding to pay tax. Reducing the extra penalty is all we can really do. And as I was explaining, if the people know that there is no record that can be used to find their cash stacks, and that there cannot be enforcement mechanisms to find it (which is how/why black money gets stacked), why do they have to take up on a tax amnesty? Did I miss your point?
I wasn’t talking about income but only cash. And only in the context of Govt not getting any black money by way of hoarded cash not coming back into the system. It was supposed to be two to three lakh crore or even five lakh crore. Had say two lakh crore been “extinguished” the exercise might have been worth the effort and the pain and deaths. Since you seem to have no problems with tax-evaders not being caught and taxes being paid or not paid, I posed a question.
The guy who is bringing four lakh cash might also have paid IT at normal rates for his declared income, let’s assume. Let's assume he is being allowed to bring in four lakh cash without being forced to pay tax. The salaried guy has paid taxes and has some savings in his bank, let's assume. But he doesn't have cash. He can of course say at the end of this tamasha "Had I known this I would have also amassed black money".
But that is what has happened through this exercise also:
The honest tax payer has paid his taxes but was told to queue up and/or face hardships. Banks didn't have cash for months. Informal sector practically crashed; labour, who didn't pay income tax or didn't earn money enough to even manage his months expenses had to go without job. All the while the black money hoarders distributed their money through cooks and drivers (to quote your own modus operandi) and eventually paid no income tax on the hoarded cash. They might yet pay some if IT Dept catches some of them from the 1.8 million or so "suspect" guys. The others would still have escaped with zero tax for their additional income/black money.
Yes, it would be illegal (and I said this also) to tax someone for four lakhs and not the guy who brought in cash worth four lakhs. But then if the Govt was so desperate it could have pulled off this illegal measure also. After all, it has denied me (and thousands and lakhs of others perhaps) value for my legitimate money through an order that abruptly ended such an exchange.
People may opt for tax amnesty if only to get rid of the permanent worry about ill-gotten wealth and black money.
Getting three times or six times of an IPL TV rights money through a demon exercise is surely no achievement at all considering the pain that it caused, not to speak of deaths. And not forgetting the continued havoc it is causing to the economy. There would be no point in getting the economy back in shape after two years (from demon date) and showing a GDP of 8 % if that could be possible. For, by then people would have suffered immensely. Suffering would not mean standing in queues and being out of job temporarily.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Wed Sep 06, 2017 2:12 pm

Mugundan wrote:
Wed Sep 06, 2017 11:09 am
I wasn’t talking about income but only cash. And only in the context of Govt not getting any black money by way of hoarded cash not coming back into the system.
This is where we differ. There is no cash, and no money, that is in your possession (even a "naya paisa" as we Malayalees wuld say) that is not income. It is all income to pay tax on, unless you can show some record that it is tax-exempt income. I think you are wrong, if I am not wrong :)

If in any year, the new income is under 2.5 lakhs, you don't have to pay tax on it. Technically, that means you can amass a little bit of cash or bank balance year to year and have that with you. It's not black money, but if you are questioned, you have to show that it was legitimate savings. If you are a casual wage laborer and you have 15 lakhs cash sitting with you, you cannot say that you were earning 2 lakhs a year for the last 10 years and that you spent only 50,000 each year. So, if you have more than a couple of lakhs cash sitting with you, better declare it at some point and pay tax, or keep believable evidence that you actually could have done what you said, and claim that using a bank is against your cult religious belief or something!
It was supposed to be two to three lakh crore or even five lakh crore. Had say two lakh crore been “extinguished” the exercise might have been worth the effort and the pain and deaths. Since you seem to have no problems with tax-evaders not being caught and taxes being paid or not paid, I posed a question.
I didn't say that. I have a problem in tax cheats not paying tax, because it is unconstitutional (and even a law from the legislature that there will be lesser-than-the-standard-tax on the tax-cheats' declared cash, will be struck down by our courts as unconstitutional). Even if I say I don't care what tax rate they pay, there will be a lot of people who will file lawsuits against it. I only meant that I didn't care if they got punished with penalties (or if their names came out or anything).
The guy who is bringing four lakh cash might also have paid IT at normal rates for his declared income, let’s assume. Let's assume he is being allowed to bring in four lakh cash without being forced to pay tax. The salaried guy has paid taxes and has some savings in his bank, let's assume. But he doesn't have cash. He can of course say at the end of this tamasha "Had I known this I would have also amassed black money".
But that is what has happened through this exercise also
But that is the case with all fraud activities out there, and the public know it. Everybody knows that a lot of people commit a lot of frauds (age-cheating, resume-cheating, disconnecting electricity meters, smoking where they shouldn't, colluding with merchants to not pay sales tax, etc -- not just income tax cheating). Only very few get caught. Still a lot of people do not do a lot of those things. People may say "I could have done this too", but most of them wouldn't have. But this is where the true story of how black money people managed to distribute their currency to others, or whatever losses they incurred in the process, need to be brought out. Indian press is useless as usual in all this. Pathetic. They are good at quoting some economists (that too from the US and all that), but terrible in truly researching important matters.
The honest tax payer has paid his taxes but was told to queue up and/or face hardships. Banks didn't have cash for months. Informal sector practically crashed; labour, who didn't pay income tax or didn't earn money enough to even manage his months expenses had to go without job. All the while the black money hoarders distributed their money through cooks and drivers (to quote your own modus operandi) and eventually paid no income tax on the hoarded cash. They might yet pay some if IT Dept catches some of them from the 1.8 million or so "suspect" guys. The others would still have escaped with zero tax for their additional income/black money.
My "modus operandi" is just a guess. I am just not sure if that is what happened, except for vague anecdotal evidence. If only 18 lakh accounts were suspect (and they each had 2.5 lakhs) then only 0.45 lakh crore went into "cooks/drivers" accounts. Seeing that the government gave that number way early in February, I am assuming that only those could be easily identified from some criterion - and these aren't really the cook/driver accounts. Hopefully there were about 10 times that many suspect accounts, and some 4.5 crore got moved around.
Getting three times or six times of an IPL TV rights money through a demon exercise is surely no achievement at all considering the pain that it caused, not to speak of deaths. And not forgetting the continued havoc it is causing to the economy. There would be no point in getting the economy back in shape after two years (from demon date) and showing a GDP of 8 % if that could be possible. For, by then people would have suffered immensely. Suffering would not mean standing in queues and being out of job temporarily.
Hey, that IPL figure of 16,000 crore only shows how big cricket is. It is no mean amount. Larger than many states' budgets. It is 0.75 percent of the national budget. My hope is that at least some 4 times that amount got distributed as commissions. That plus the Amnesty tax would be come to about 3% of the national budget, and about 1% of per capita income. That would require at least 2 to 3 lakh crore black money to have got distributed in bank accounts. Very doubtful if that happened, as of now. Even if say a 1 percent per capita income went into the economy as some stimulus, that still will not offset the loss of productivity, which over a two year period should be equivalent to at least a 1% drop in national production in a year. Generally, on numbers itself, it does not seem like this was worth it. But then again, longer term effects are difficult to say; it is positive, but how positive is uncertain. Increase in bank savings, and a larger tax base would certainly help, but how much? I don't know.

But even the economists and anti-demonetization "experts" cannot say "I told you so", because none of them really told it so. The talk was only about whether there would be 2 lakh crore or 5 lakh crore as currency that wouldn't return, for RBI to print and pump into the system. Nobody predicted that only some Rs 15000 crores would be unaccounted for, like we found out. Now the question is simply on whether there is any chance that 5 or 6 lakh crores got redistributed in bank accounts and whether a 1.5 lakh crore of that became commission. Anything less, and we are looking at a futile and negative exercise in the short term of a year or two.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by Mugundan » Wed Sep 06, 2017 4:03 pm

jayakris wrote:
Wed Sep 06, 2017 2:12 pm
Mugundan wrote:
Wed Sep 06, 2017 11:09 am
I wasn’t talking about income but only cash. And only in the context of Govt not getting any black money by way of hoarded cash not coming back into the system.
This is where we differ. There is no cash, and no money, that is in your possession (even a "naya paisa" as we Malayalees wuld say) that is not income. It is all income to pay tax on, unless you can show some record that it is tax-exempt income. I think you are wrong, if I am not wrong :)
No, we don't Jay. Except that may be I put it wrongly. I am not saying cash in my possession is not my income. The guy who is hoarding black money has accumulated, let's say, one crore rupees that he has not paid tax on and has not declared. That is black money or wealth or whatever. Only when he declares it it becomes income. He doesn't show it. Let's say he sold one plot of land for 1.25 crore. He takes 25 lakh in cheque and rest in cash. That is his black money. The guy who paid him might have given the entire money in 'white' (cash as well as cheque). I don't have such large sums of cash nor the means by which I can earn that kind of money. Thus I have paid tax for whatever is my income. Mainly TDS and extra if I earn something extra. The guy who sold his plot has generated Rs one crore black. If the Govt declares an amnesty he goes and puts it into his bank and it becomes white. It is illegal and unfair of course. But the Govt does it all the same. How I don't know.

Now the economy is boosted by one crore rupees and no one is caught and no one is put in prison and no one is asked to pay tax.
In the Demon method, the only gain if it comes about is, depending on what the deal is, cooks and drivers may put total of 20 lakhs of one crore into the system (provided they were given 20 per cent commission), no tax is paid by the black moneywalah since his account doesn't show him to have returned cash worth one crore or 80 lakhs and he is happy that his black has become white. (And they say only about six per cent black money is in cash, or was in cash. All the more reason to wonder whether DeMon was needed, whether deaths were inevitable, whether hardship was part of an attempt to help the country destroy a parallel economy, to root out terrorism, to minimise fake currency etc).
Am I wrong in presuming this?
Everything, as you say, will depend on 1) how much additional tax (other than normal year-to-year increase) Govt would get out of this exercise and 2) how much cooks and drivers would have earned as commission and put it back into the system.
I know nothing about economics. I must state here. Nothing at all.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 » Wed Sep 06, 2017 5:28 pm

Jay, I agree that from the legal angle of equality and fairness, a lower tax-rate would have invited lawsuits and may be struck down by the courts. I had not thought along those lines before. Thanks for the explanation.

However, I do not think you are right that no country has done a tax amnesty at lower than the tax rate. I think Argentina did a 10% tax rate whereas its personal income tax rate is 35%. Argentina Tax Amnesty

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Wed Sep 06, 2017 7:30 pm

prasen9 wrote:
Wed Sep 06, 2017 5:28 pm
However, I do not think you are right that no country has done a tax amnesty at lower than the tax rate. I think Argentina did a 10% tax rate whereas its personal income tax rate is 35%. Argentina Tax Amnesty
Maybe I was overstating the lack of constitutionality of it, or was too optimistic of the courts getting involved. That doesn't seem to be discussed as an an issue, based on what I see in quick google searches, but the plain unfairness of tax amnesties with lower rates has been discussed extensively. That may be why I don't see much on tax amnesties around the world in the past with low rates like what ARG had. And they were pretty successful with it. It appears to me that these lower-rate tax amnesties are a new thing around the world? Looks like others in S.America also tried it recently. Maybe some governments got away with it recently, by saying that it is money that the country would anyway not have, and so good for everybody. But Indonesia, that had a similar tax amnesty program from late last year, actually had some serious worker's union strikes, precisely on the basis that it was unfair to workers who paid tax honestly. If I were to guess, India would have had agitations too. Indian public and institutions are of that kind.

One other thing to note is the effect of inflation in most countries that recently had tax amnesties. Argentina is one of the worst in the world, with inflation in the 10 to 20% range for a couple of decades or more (and at some 25% over the last couple of years before this tax amnesty). India has had it somewhere in the 8 to 12% range under Congress and 4 to 8% range under BJP in the last couple of decades (down to just 2 to 4% lately). The effect of inflation rates on the perceived unfairness in tax rates is too complicated for me to figure out! ARG was targeting mostly incomes kept offshore too.

The next thing is that tax evasion is not the only issue behind the black money in currency in India. Even if the cheat gets assured that he won't be prosecuted for tax evasion after declaring his money, he/she has no guarantee that the illegal activity that resulted in the black money won't be investigated. How can a government official, with cash bribes amounting to 10 times his annual salary sitting with him, declare it and be sure that he won't be investigated for taking bribes? This is actually as much a (if not a bigger) reason than reluctance to pay tax, behind why many people had black money. An amnesty program with any low rate, would do nothing about it.

So, I doubt any income tax amnesty option could have substituted for demonetization to flush out hoarded cash. The potential of success from demonetization hinged on just one thing, really. That is the amount of hoarded cash we're talking about. three possibilities.

(1) Black currency may have only been one-fifth or one-tenth of the 3 to 5 lakh crores that the "experts" were guessing, both inside and outside the government. If so, Modi screwed up big-time, trusting others' estimates. No question.
(2) If there was indeed 3 to 5 lakh crores in hoarded currency, then the government can still make it a success by going aggressively in checking for new bank accounts or accounts with nothing that got 2.5 lakhs in them suddenly. There has got to be at least 100 lakh such accounts and not 18 lakhs like the govt said early this year.

The latter option is not as easy as it sounds. We don't have enough tax professionals to do that. Whose money it was that each cook and driver deposited, isn't easy to establish. And then, to go after that many people, we may need serious police actions. That could be serious trouble, as we are targeting such a large number of the poorer people first, and not the original tax cheats. People will start fast unto death against cruel enforcement and all that. Not gonna happen. So, option (2) is pretty much out, except for find some 20000 crore in tax revenue, some 1/5th of the potential revenue on full enforcement on 100 lakh truly suspicious accounts. That is pittance.

That again brings me to the only thing left. (3) The commission that I keep guessing got exchanged to cooks/drivers! .... I still have no clue if it did, or how much it was. If it was not really substantial, this was clearly a negative action in the short term, unlike I expected 9 months ago.

Jay

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 » Wed Sep 06, 2017 7:32 pm

Actually, other than Argentina, Germany, Italy, Belgium and many other countries tried what they called tax amnesties. I do not know the details of these and the devil may indeed be in the details. I'll try to read more and post later.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Wed Sep 06, 2017 7:44 pm

prasen9 wrote:
Wed Sep 06, 2017 7:32 pm
Actually, other than Argentina, Germany, Italy, Belgium and many other countries tried what they called tax amnesties. I do not know the details of these and the devil may indeed be in the details. I'll try to read more and post later.
True, and India had done one pretty successfully in 1997 too... but most were amnesties on penalties, not with significantly reduced rates like in ARG. More importantly, almost none of these amnesties was targeted at bringing out black currency. Not much of that will really come out, because of the fear that the criminal activities behind its creation might become known. These amnesties were all aimed at income that could be reported (i.e., not from punishable activities) but were not reported simply to avoid tax. I don't think that is the case with a large portion of cash hoards. If you want to flush out that big portion, demonetization is probably the only way (and it is not worth it either, unless the black currency is at least 25% of the printed money).

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Thu Sep 07, 2017 3:25 pm

Read this with the warning that S. Gurumurthy's opinions are normally on the saffron side of the equations.
De-mon — huge, successful course-correction
His "huge success" is based on recent numbers that are still under review (20% tax base increase etc), so maybe we can discard them... but on the long-term effects, he brings up other items. On things like cash supply and some similarities to what might have been cooking in India on property values that needed a correction, with what happened in the bubble in the US before the 2008 crash. I think others have also mentioned some of this. I haven't thought through it, to see if it all makes sense. Comments, anybody?

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 » Fri Sep 08, 2017 3:07 am

I don't know much about the complications about the issue, but, one thing I will comment on. I think that while talking about asset price increase especially real-estate and rate of increase in the US and India we need to be careful we don't do direct comparisons. First, India has a faster growth rate and higher inflation. So, the real-estate price increases have to be normalized. Second, India has much less land and way more people. So, real estate is supposed to be more of a scarce resource in India and thus the price should go up more.

This is my layman's understanding. And, as they say, half knowledge can be dangerous. So, I would be glad to be educated why my points are not really valid and what the real issues are.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 » Tue Sep 12, 2017 1:17 am

Whichever side of the political spectrum we may be on, this one we all will universally rejoice in, I think. Lalu's property seized.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Wed Sep 27, 2017 1:22 pm

This opinion article I need to speak up now by Yashwant Sinha, and the harshness of it, surprised me. I didn't find the opinion piece too insightful, but the opposition is really running with this because it is a BJP man and former finance minister saying it.

Are we in for real trouble in the economy, like he says? Okay, he spoke up and pointed out that everything has gone wrong, but what is he really asking the government to do now? The only thing I found is a complaint that we are trying to scare people with tax enforcement, and maybe a hint that we should stop that. Not sure how that helps. Did he lose all his money due to demonetization or something?

Comments, people?

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by Omkara » Wed Sep 27, 2017 1:31 pm

GST is a disruptive and inflationary. But the bjp introduced the same in haste. This has caused major problems. If the most tech savvy companies say they are finding it very time consuming to process the same, then the implementation of gst is not a well thought out decision.

Most industry guys i have meet say its a 6 month problem.

Consumption end demand is pretty decent as of now.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Wed Sep 27, 2017 2:20 pm

Omkara wrote:
Wed Sep 27, 2017 1:31 pm
GST is a disruptive and inflationary. But the bjp introduced the same in haste. This has caused major problems. If the most tech savvy companies say they are finding it very time consuming to process the same, then the implementation of gst is not a well thought out decision.
GST was under discussion for years, from much before this government, and somebody had to get it done, right? I never really looked at that as Modi's baby. Anyway, it seems like anything reasonably big that is done in India would look like it is done in haste, because there will be implementation problems in whatever we do. I had chalked it up as pretty much that, but maybe I am wrong. But yeah, we have taken some bitter pills in the last 10 months and have no idea if it will all help in the end...

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