The fight against black money and corruption must continue; indeed it must gather further momentum. But people will get more tax-compliant when they see the connect between tax-payment and enhancement of public services
In his war against black money and corruption, Prime Minister Narendra Modi has followed the great Chinese military strategist Sun Tzu, who wrote, “To a surrounded enemy, you must leave a way of escape.” The ‘enemies’ in the current context are the hoarders of black money; they have been ‘surrounded’ or ‘cornered’ by the demonetisation scheme that forced them to deposit or exchange old currency notes in banks; and once cornered, they are being given an ‘escape route’ by way of the Income Declaration Scheme (IDS).
As is typical of any war, the collateral damage here too has been quite high. But the Government seemed prepared to accept it.
The combined potency of these twin measures — the demonetisation drive and the Income Declaration Scheme — is expected to be higher than the sum total of their individual effects. Still, despite the Government’s threat of the dire consequences, some hoarders who could outsmart the Government in the demonetisation drive, may also not avail of the IDS.
These hoarders may win the battle this time around but the Government’s war against black money is far from over. The fact that the Government has announced stiff penalties after March 31, 2017, against those who do not avail of the scheme, suggests that the Modi regime is prepared for a hot chase right upto the end.
Although a case for another broad-based measure such as demonetisation seems to be ruled out in the near future, nothing stops the Government from coming out with a few ‘surgical’ measures that are not hard to imagine. The hoarders have a real choice to make: To take a holy dip before the March 31 or to live in constant fear!
While these twin schemes are meant to tackle the stock of black money, the promotion of digital modes of payment is aimed at reducing the flow of black money in the future. Digital payment is a technological fix for the issue of tax avoidance.
Whether or not the people whole-heartedly embrace digital payments, depends on the supportive infrastructure and also on their willingness to make a switch-over. As expected, the Government has announced various incentives to encourage people — both buyers and sellers — to switch over to different modes of digital payment. But the willingness of the people also depends on their attitude towards paying taxes, as digital transactions will naturally be tax-compliant.
In the past, the high tax rate environment may have dissuaded some people from paying taxes. Frequent instances of corruption and abuse of public office by those in power, may also have discouraged some people from paying taxes on a moral high ground. But times have changed now. People need to recognise it. In keeping with its promise, the Modi Government has indeed been able to provide a clean, corruption-free administration thus far. It has also taken a series of measures to deliver on the development agenda. Building on these positive trends, the Government also needs to inculcate tax paying culture in the country.
Most people would love paying taxes when they start experiencing the difference in the quality of life around them. Improvements in broader macro-economic indicators such as growth and employment, foreign direct investment, India’s ranking in ease of doing business and so forth are all fine, but these improvements need to percolate down to the level of individual experiences so that they can connect the dots between those experiences and the payment of taxes.
After all, we want the people to be paying taxes not just out of their legal obligation, but also because they value various services that the Government provides, and because they want to give back to the society. Most people would proudly do so if they could see the connection between the taxes they pay and the services they avail.
To improve the quality of life of the people, a beginning has to be made somewhere, and the best place is where different tiers of the Government — municipalities and panchayats, States and the Centre — come together to create some positive examples to instill confidence in governance and motivate the people to pay their dues.
Winning hearts and minds of the public requires a mindset, diction and narrative different from what is needed in waging a war against black money and corruption. Modi has demonstrated his resourcefulness in handling these two distinct situations. He is uniquely positioned to succeed where the Chinese military strategist, Sun Tzu, would have failed!
(The writer is a development economist, and was with the Bill and Melinda Gates Foundation and the World Bank)