The role of Income Tax Department of India and how effectively it played its role during and after demonetization

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Direct taxes are computed directly on the income of a person, rates depending on the level of income. These include income tax, real property tax, personal property tax, taxes on assets. It’s charged to individuals, co-operative societies, firms, companies, Hindu Undivided Families (HUFs), trusts and any artificial judicial person. The Income Tax Department or IT Department is a government body monitoring the income tax collection by the Government of India.

Central Board of Direct Taxes is a judicial body formed under the Central Board of Revenue Act, 1963 dealing with the collection of direct taxes. As an arm of CBDT, Income tax department is responsible for following direct taxation acts passed by Parliament of India.

The income tax department has the power to inspect books of accounts, carry search operations if it suspects a case of tax avoidance or tax evasion.

In the context of the demonetization of the two high denomination currencies (500 Rs and 1000 Rs) on November 8, 2016, the Income Tax department issued hundreds of notices under section 133 (6) of the Income Tax Act for explaining the source of money deposited from individuals and firms who deposited large amounts of scrapped Rs 500 and Rs 100 currency notes. This was part of the vigil to check instances of tax evasions, money laundering and black money The IT department also carried out operations against real estate players, bullion traders and suspected hawala operatives to stop illegal use of the old currency with raids like the one on a cooperative bank in Mangalore where it was detected that five societies exchanged with a local cooperative bank account in Mangalore currency amounting to Rs eight crore.

The IT department asked NGOs availing tax exemptions about their cash balances as on November 8. These were to check suspected black money in old currency paving to be converted white under the head charitable contributions or donations.

According to a PTI report dated December 22, 2016, the raids carried out by the IT department uncovered Rs 3,185 crore of undisclosed income since demonetization. New notes worth Rs 86 crore (mostly 2000 Rs denomination) were seized by the Income Tax department. The department conducted 677 searches, survey and inquiry operations, issued more than 3,100 notices to various entities on charges of tax evasion and hawala-like dealings, seized cash and jewellery worth over Rs 428 crore, referred over 220 cases to CBI and the Enforcement Directorate (ED) to probe other financial crimes.

According to a research report by Wharton dated January 5, 2017, Wharton Emeritus professor of management Jitendra Singh opined that while it is too early to assess the impact of November 8, 2016, demonetization, the move raised long-term questions. “What will have been gained from this step, and at what cost and mostly borne by whom?” he asked, suggesting rival political parties protesting against demonetization could “broaden their tactical agenda to harm or even derail the GST implementation.”

There were so many senior citizens, housewives, small traders and businessmen finding it difficult exchanging their current 500 Rs/1000 Rs note. It was an attack on their right to lead a peaceful life. In the short run, we have seen liquidity crunch, which was termed by pro-government camp equivalent to labor pain painful in the short term but good for the long term.

As the media reported daily of currency crunch faced by the ordinary citizens throughout the length and breadth of the country with many deaths because of stress standing in the queue, it was appearing that PM Narendra Modi had caught the wrath of masses. What infuriated most was the people with the right connections could access crores of rupees in the new currency. The credibility of the banking industry was at stake with a number of instances of banking personnel from bank managers to security guards involved in hoarding new currency notes. Prof.  Jitendra Singh said in the January 5 report that it remained to be seen how the negative sentiment against demonetization could hurt the BJP and its allies in assembly elections in Uttar Pradesh in February-March.  Now, the news from the election held 11 February to 8 March in 7 phases is that the BJP won the three-quarter majority of 325 seats. In other words, it negated the claim of public unrest against the demonetization and that the demonetization drive went well with the general public despite claims of unrest from the media.

It appears that there is widespread tax evasion and tax avoidance still happening. For  instance, while collection of direct taxes nearly doubled from 3.7 lakh crore rupees in 2009-10 to 7.4 lakh crore rupees in 2015-16, its share as a percentage of total taxes has dropped by 10 percentage points over the same time.  Residents of Gujarat (a highly industrialized state) and Tamil Nadu appear to pay a lot less tax when compared to the economic clout the state enjoys. While the state of Karnataka with a state GDP of 7.02 made contribution of Rs 60,595 crores in direct taxes for the fiscal year 2014-15 and Delhi with GDP of 4.51 made contribution of Rs 91,247 crores, the corresponding figures of Gujarat are GDP 7.66, direct taxes Rs 35,912 and Tamil Nadu 9.76 GDP and direct taxes Rs 44,732. This is not good news for those who volunteer direct taxes as a means to address income inequity.

Initiatives by the Income Tax department to reward loyal income taxpayers with certificates  – “bronze” category, paying income tax in the range of Rs 1 lakh to Rs 10 lakh a year, between Rs 10 lakh to Rs 50 lakh silver category, between Rs 50 lakh to Rs 1 crore, gold category –  is a  step in the due direction. Income tax department plays a role in helping equitable distribution of wealth. As we progress towards a more responsible society, it is expected that more and more people will disclose their true income and wealth thereby building a foundation for a just society.  In order to simplify the tax system, the Direct Taxes Code or DTC was proposed in 2009 to replace the existing Indian Income Tax Act of 1961. However, the present regime has decided to abandon as it feels that the objectives of DTC are well taken care with the present integration.

The demonetization exercise can be hailed for trying to put a check on counterfeit currency given how our neighboring country Pakistan was utilizing the same for funding terrorist groups. Also laudable is an attempt to move towards a cashless society. However, it is foolish to ban a prevailing currency just because of a suspicion that many individuals are holding the same unaccounted. Those guys who are holding now will do the same with the new 500 Rs and 2000 Rs. This step is an acknowledgment by the system of its inefficiency to detect the so-called black money when it is generated in the first place. Also, drive towards a cashless society should be a gradual process with individuals having the right to exercise their choice of transacting in cash or not. As a 75-year-old if I am comfortable with cash, why should the government dictate me to open a new bank account and embrace the cashless way of living?

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