"The Banking Cash Transaction Tax has turned out to be a boon, not for the modest revenues it brought which was never its purpose, but for the remarkable trails it has helped establish.... I propose to continue theBCTT for some more time..."
—P. Chidambaram, February 28, 2006
The finance minister is ecstatic about the banking cash transaction tax (BCTT) he announced in last year’s budget. For the FM, who has been at the forefront in initiating measures to curb the black money menace in India, this was another feather in his white cap. Even today, one remembers the 1997 Voluntary Disclosure of Income Scheme(VDIS), through which Chidambaram (as the then FM in the United Front government) gave amnesty to holders of black money. Both theVDIS and BCTT were criticised initially. But from the finance ministry’s perspective, both have proved to be a success.
During this year’s budget speech, the FM disclosed details of a case where three entities had laundered over Rs 1,500 crore in 18 months. He also added that the tax has "helped the (income tax) department to detect bogus bills, accommodation entries, artificial loss claims and dummy firms". Agrees J.G. Pendse, member (investigation), Central Board of Direct Taxes(CBDT), "It’s an investigation tool with little revenue implications. The collections under this tax were only Rs 269 crore for the eight months from June 2005 till February 2006, but it has given information about the general practices to avoid levies like income tax, sales tax and vat."
In fact, over the past 21 months, the finance ministry has been alarmed at the ever-growing tentacles of the black economy in the country. Most experts are convinced that the parallel economy has grown in size despite the theoretical assumption that it should have reduced due to liberalisation, lower tax rates, reduced red-tapism and the dismantling of the licence-quota raj. Economists feel that the extent of black money today is Rs 10,00,000 crore, compared to Rs 8,30,000 crore estimated by the rbi in 1992.Therefore, it has become paramount for the FM to unearth black money, especially since the success of his "reforms with a human face" economic policies depend on highly optimistic revenue collections by the government each year. Until now, he has been able to show an annual 20 per cent growth in revenues in the past two years. But the FM needs to find a consistent and a sustainable way to increase thetax-GDP ratio, even in years when the economic growth isn’t as high as what one has witnessed in 2004-05 and 2005-06.Given this context, the BCTT, a 0.1 per cent on cash withdrawals of over Rs 25,000 by individuals and over Rs 1 lakh by firms from their current accounts in a single day becomes a critical ingredient in tracing black money. Poring through over 20 million accounts in 65,000 branches of 355 scheduled banks, theCBDT selected 120 cases from 200 branches for further investigations. By February-end this year, the finance ministry had found five cases—four in Delhi and one in Mumbai—where the only intention was to evade taxes.
The worst of them was the one that involved three groups with current accounts in a Federal Bank branch in Fatehpuri (Delhi), which was mentioned by Chidambaram in his budget speech last month. The trio were middlemen, who would discount various bank drafts, put the money in their accounts, withdraw cash and give it to people who had given the original drafts. The reason: the middlemen were helping those who had come from other states to get cash for high-value and untraceable purchases. Explains aCBDT official: "The drafts were used to carry black money from other cities, while payment to Delhi-based sellers was made in cash after the drafts were discounted by the three groups. Neither the buyers nor the sellers had to show such sales in their accounts and, thus, didn’t pay any taxes on them."
In another investigation of accounts in Punjab National Bank’s branch at Lawrence Road (Delhi), the officials found that seven account holders were issuing fake bills to flour and dal mills in the city, collecting the money in cheques, and giving it back to the mills in cash. TheCBDT found fake bills, meant to reduce declared incomes, to the extent of Rs 380 crore to 38 parties. Similarly, inUTI Bank’s branch in Krishna Nagar (Delhi), it uncovered false transactions of Rs 104 crore for purchase of metal scrap and, in a case involving two dal mills in the Delhi branch of State Bank of Mysore, it found concealed income of Rs 4.5 crore. In Mumbai, it trapped a hawala operator whose account(s) involved cash transactions of more than Rs 16 crore.
According to the banking community, the BCTT has helped in another way. It has forced individuals and firms to shift from cash to demand drafts and cheques, thereby reducing the component of the black economy. The earlier modus operandi to avoid any transactions that could leave a paper trail has vanished as people have realised that those involving cash can now be traced because of the new tax. "Earlier, there were people who avoided drafts and cheques, but now they realise it won’t work," says j&k Bank’s M.A. Shah. He adds that software has made it easier for the banks to pinpoint shady transactions.
However, bankers contend that the bctt worries them in some respects. Since the tax makes it mandatory for all scheduled banks to submit a monthly report about all transactions that attract the levy to the revenue department, the bankers are caught in a dilemma. Says a top official in a leading bank, "We have problems from both sides. Officially, some rules make it mandatory for us to part with confidential information and details about our customers. Then there are rules that force us to prevent the same information from becoming public."
Banks are, therefore, not too keen to part with information. Most banks provide details only when specifically asked to do so by the I-T officials. "We do so only when the authorities ask us for specific information based on the tip-offs they may have received," reveals a Mumbai-based banker. AgreesCBDT’s Pendse, "There has always been a reluctance on the part of banks to share customer details. Even now, the compliance is not total." Says another senior I-T official: "We are not satisfied with the response from the banks. It’s taken a lot of effort and correspondence to get them to agree to share information."
Experts also contend that the BCTT has not resulted in major revelations. "The modus operandi was known. The finance ministry can always investigate accounts which show large and unusual movement of cash. To find five cases in eight months is nothing," says one. Even theCBDT officials agree they don’t have the manpower to investigate most cases. With just 14 director generals of investigation who are the nodal bodies in the I-T department across India, one can’t expect them to look into crores of current accounts. According to finance ministry sources, the regional directorates pick up 3-4 branches every month, study the cash withdrawal patterns of various accounts, and decide whether to go ahead with the investigations.
But, for Chidambaram, it’s a great success. And he is in no hurry to get rid of the contentiousBCTT.
By Arindam Mukherjee with Saumya Roy
