Citizens have a little over two weeks to come forward and disclose any undeclared assets or income and pay tax dues under the government’s Income Declaration Scheme 2016, which closes on September 30.

Prime Minister Narendra Modi has frequently taken a tough stance on black money, including efforts to bring back black money stashed abroad.

“For all those who are still willing to come in the mainstream, I have said this in public that 30th of September is your last date,” he said in an interview earlier this month. “You may have made mistakes with whatever intentions. Whether it has been done willingly or unwillingly, here is your chance. Come into the mainstream…no one should blame me if I take tough decisions after the 30th

The prime minister’s tough line, however, has not yet evoked the desired response. Only about Rs 4,000 crore has reportedly been declared under this scheme – implying tax collections (at the penal rate of 45% of the undisclosed income) of Rs 1,800 crore so far. This is hardly a blip on India’s estimated FY ’16 income tax revenue of Rs 3.5 lakh crore.

The hunt

Every government wants to track down black money and undisclosed income and assets for several reasons – to boost revenue, send a clear message to lawbreakers and clean the system, among others.

However, doing so is as difficult as it is complicated. Let’s take a look at the history of various schemes to tax black money.

Chartered Accountant Rajesh Kayal observed in a recent article in The Indian Express:

Between 1951 and 1997, 10 amnesty schemes were announced to declare unaccounted money, most of which were misused. Dishonest people who did not pay taxes declared undisclosed incomes and assets, and got away with paying lesser than normal taxes, with all immunities. Only two of these schemes were seen as successful: the income declared under amnesty circular 1985/86 was Rs 10,778 crore, and under VDIS [Voluntary Disclosure of Income Scheme] 1997, Rs 33,000 crore.

As for the quantum of black money there is in India, by the previous United Progressive Alliance government’s own admission, there is no reliable estimate of this. In May 2012, the then Ministry of Finance published a white paper on black money where it said:

“By its very definition, black money is not accounted for, thus all attempts at its estimation depend upon the underlying assumptions made and thesophistication of adjustments incorporated. Among the estimates made so far, there is no uniformity,unanimity, or consensus about the best methodology or approach to be used for this purpose.”

The paper mentions an old estimate by the National Institute of Public Finance and Policy, according to which the black economy – economic activity or money circulated outside formal banking channels and not taxed by the government – is equivalent to about 20% of the country’s Gross Domestic Product. Recent estimates also peg it at about the same amount.

Necessary evil?

The sheer size of India’s population, combined with the many ways to avoid tax, the size of the unorganised economy, and the use of cash for payment make it difficult to create a permanent system to tackle corruption and black money.

Moreover, black money also keeps the economy going. Kaushik Basu, the chief economist of the World Bank and former chief economic adviser to the Indian government, has argued that the pervasive use of black money helped protect India against a banking crisis that has gripped most other large economies in recent years. Given its intrinsic and large role in India’s economy, any effort to control black money and bring it under taxation is bound to be a tough job.

Strengthening the system

There are certain sectors, such as gold and real estate, which are safe havens for black money. Reforms in these sectors are an effective way to curb black money. As the 2012 white paper noted:

“…gold trading…was one of the major sources of black money generation and even crime prior to the reforms induced in that sector. While gold inflows into India remain persistently high, gold smuggling is no longer the menace as it used to be a few decades earlier. Similar or more effective reforms of other vulnerable sectors like real estate can yield a significant dividend in the form of reducing generation of black money in the long term.”

In recent years, the use of technology and identification numbers linked to transactions such as the Permanent Account Number, or PAN, given to every taxable employee, and the biometric-based unique identification number, Aadhaar, are creating a system for the government to track exchange of money. Regulation plays another role – for example, the creation of Securities Exchange Board of India monitors and regulates the stock market. These reforms will take some time to show in results, but are an important start.

Cashing out

The use of cash can fuel the black money economy, as transactions using paper money are harder to track. In the last fiscal alone, currency in circulation saw a sharp increase, which the RBI said could be partly linked to the several state elections held in that period – hinting at the distribution of cash as incentives to voters.

In this regard, the growing popularity of digital payments through electronic wallets and the government’s Unique Payment Interface could help curb cash transactions.

But most importantly, a vocal and public campaign against black money and corruption, led by the government, could go a long way.

Anupam Gupta is a chartered accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.