Why It Is Reassuring To See Aravind Panagariya Raise The Flag On Tax Terrorism 

NITI Aayog vice-chairman, Arvind Panagariya has very rightly raised an important issue – tax terrorism in the wake of demonetisation. According to this article in the Indian Express, Panagariya has written to the Prime Minister’s Office advising that steps should be taken to ensure that innocent citizens are not harassed by tax authorities.

That someone within the government is acknowledging the possibility of such harassment is re-assuring.

Soon after demonetisation was announced, finance minister Arun Jaitley and other ministry officials had assured that deposits up to Rs 2.5 lakh would not be questioned, that such deposits would not be reported to the tax authorities. Jaitley had particularly mentioned housewives, small businessmen and farmers as those who may not face much scrutiny.

Mid-way into the exercise, came the news that even amounts below Rs 2.5 lakh would be scrutinised. This was immediately labelled as another instance of the government going back on its word, though let us not forget that for several years now, it has been mandatory for cash deposits above Rs 50,000 to be accompanied by PAN details.

The government’s rollback (if it could be called that) has been justified on the grounds that the earlier no-questions-asked assurance was being used to launder money. People were depositing cash just below the threshold in Jan Dhan accounts as well as that of relatives and friends to escape scrutiny. The fact that Jan Dhan accounts have seen a huge surge in deposits after November 8 does confirm these suspicions. According to this report, as much as Rs 41,523 crore has been deposited in Jan Dhan accounts between November 10 and December 23.

Clearly some action will need to be taken against money laundering. But how is one to decide if the instances of money-laundering are significantly more than the instances of genuine deposits? It will be easy to dub all high value transactions in Jan Dhan accounts dubious, but will it be fair?

Ditto for instances of housewives and senior citizens who deposited large amounts of cash in their accounts. Many middle class families keep over Rs 1 lakh as cash for medical and other emergencies. Many senior citizens especially keep large amounts in bank lockers for medical emergencies. It may not make sense for them to do so, but they do. Their children often leave cash with them to save them repeated trips to the bank and these may also have built up to a large amount. Will it be fair to see all of them as potential money launderers?

The tax bureaucracy will be rubbing its hands in glee; suddenly new avenues for corruption have opened up. That is why someone in the government other than from within the tax set up must work out norms for selecting transactions for closer scrutiny.

Panagariya has suggested that no questions be asked of deposits up to Rs 2.5 lakh. This is a sensible suggestion and will provide some reassurance to the genuine depositors; they are unlikely to have deposited more than this and many have deposited less. Yes, several dubious transactions will slip through the net in such cases, but the government should perhaps quietly accept that it has been outwitted.

The many Jan Dhan accounts which have seen a surge in deposits can perhaps be put under watch to see the pattern of further deposits in new notes (an old-notes-for-new business has thrived during the past 50 days) as well as withdrawals. Genuine depositors may let the money stay in the banks, not willing to risk another demonetisation exercise; the dubious ones may start withdrawing to return the money to the real depositors. A few big-ticket withdrawals from accounts that were largely dormant should set alarm bells ringing.

Panagariya has also suggested drawing up a generous formula to determine the annual savings of housewives. A similar formula could also be worked out for senior citizens. How this formula is drawn up will be crucial.

The government should also refrain from setting targets for tax officials. This is a sure-shot recipe to encourage harassment. The notoriously corrupt tax bureaucracy will merrily overlook cases of dodgy transactions if they are handsomely bribed and go after soft targets like genuine Jan Dhan account holders and middle class depositors who can be easily intimidated.

Panagariya has put out very valuable suggestions, which the tax bureaucracy will not like. Now one has to wait and see if the former is taken seriously and his advice acted upon or whether the latter continues to run riot.