Terming the declarations of Rs 65,250 crore under the black money disclosure scheme as a “tip of the iceberg”, tech investor T V Mohandas Pai feels the government now needs to demonetise Rs 1,000 notes and abolish capital gains tax on property and gold sales to drive more money into the formal system.

“I think it’s a tip of the iceberg because India has physical cash in circulation of Rs 17 lakh crore…that is 12 per cent of this year’s GDP. Very, very high for any country,” the former board member of Infosys told PTI.

Of this Rs 17 lakh crore, 85 per cent is in Rs 100, Rs 500 and Rs 1,000 notes. “I would estimate that at Rs eight lakh crore of the Rs 17 lakh crore – around 50 per cent – is black money,” he said.

“The government should look at demonetising Rs 1,000 notes and come out with a scheme now to say that anybody with Rs 1,000 notes should deposit them into banks regulated by RBI (and not cooperative banks) with PAN and Aadhaar numbers,” said Mr Pai, former CFO of Infosys.

He said the government must abolish capital gains tax on the sale of property, if held for more than three years.

“Black money report released in Parliament says that 40 per cent of all black money generation happens in real estate. One major factor is capital gains tax. If capital gains tax is abolished, the seller will demand full cheque payment because he does not have to pay tax and the entire sector will be reformed in three years,” Mr Pai said.

According to him, India has $1 trillion (Rs 70 lakh crore) of gold. “Total gold value of India at 25,000 tonnes is Rs 70 lakh crore”. India imports 750-1000 tonnes of gold every year.

“The government should have a scheme to say if anybody has got gold on their balance-sheet declared for wealth tax or otherwise and hold it for three years and sell, there will be no capital gains tax. This will make more and more people look at gold as an investment rather than gold as an asset to hold black money because if it’s made tax-free it will be like stock, it will drive black money out of circulation.”

In such a scenario, imports would come down because there would be large local sales. Out of 25,000 tonnes, even if three per cent is sold locally, it would be 750 tonnes, noted Mr Pai, also member of the board of directors of NSE.

“These reforms – de-monetising Rs 1000 notes, abolition of capital gains tax on property and abolition of capital gains on gold sales by people who hold it- will reduce black money in the next five years by 40 to 50 per cent,” he said.

“Because we need policy changes to tackle this problem and unless policy changes come, things will not improve. The lowering of tax to 30 per cent from 45 per cent has greatly improved compliance and reduced black money in the economy. But now black money is in real estate and gold, and these areas need to be tackled now,” Mr Pai said.
He noted that the government has got enormous data through central excise, new GST, income tax, and the banking system.

“If they collate all this data, they can find out where black money is generated, where black money is stored, and where black money can be tackled.”

The government should set up a high-quality revenue analytics unit, to look at Big data, apply artificial intelligence and machine-learning, create integrated data bases and totally crack the flow of money like the US does. “Catch these people and put them in jail,” Mr Pai said.

“Because we need data analytics to find out sources of black money. The government should have a trained group of people to prosecute these people.”

“Today, if you do a raid, they go to court and take a stay and for 20 years nothing will happen. It’s a broken system. So, we need trained people to prosecute using these data and we need special courts with simple process to try them and put them in jail. This is required to reduce black money in the economy,” he said.

A very strong leadership is needed, because the success of the scheme has shown that strong leadership from the prime minister, the finance minister and the revenue secretary has really
worked, he said.

Mr Pai said the disclosed undeclared assets of Rs 65,250 crore is a “very pleasant” surprise as not many people thought it will be successful primarily because 45 per cent tax rate was high.

“It is very obvious that Prime Minister Narendra Modi’s relentless focus on execution of policies is paying off. He has put pressure on the system to perform and the system has performed.”

Calling for transparency in political funding, Mr Pai said the substantial amount of donations received by parties is by cash without any receipts being given, indicating that most of this is all black money.

“We need a reform to say as in the UK, all money received by political parties should have the name of the person, PAN number, or Aadhaar number. Now, 100 crore people have Aadhaar number. Now there is no excuse for not mentioning Aadhaar number for any receipt by an political party,” he said.