Recent events have evoked a mix of emotions among Indians. The rich have bought expensive white goods and luxury items in a rush to consume whatever cash they had. Unscrupulous businessmen paid advance salaries, retired debt with old notes and wove schemes to whitewash as much cash as possible. The common household swung between smug satisfaction at having a wallet of credit and debit cards to despair while scrambling to pay for groceries, gas refills and the dhobi. The poor daily wage earner was left worrying about how to plug risks to his income.
There is no denying that the poor have been inconvenienced the most due to the shortage of cash. Not all of them have bank accounts, and not many are literate enough to deal with formal processes of the banking system. However, they do not have stocks of cash nor do they earn enough to pay taxes. Their problems will ease when there is enough money to go around. Hoarders, white-washers, money-mule seekers, cash mafias and exploitative employers can endanger restoring cash for the use of the unbanked poor. It is not clear if the government has the wherewithal to protect them while penalising the rich. The return of this segment to its cash dealing is critical to its wellbeing, and will not impact the macro objectives of demonetisation. This segment cares about the flow of cash, and not the stock of cash. It does not have enough to hoard.
The working class that earns a formal salary is already subject to TDS and is paying taxes where applicable. This segment is rightfully smug as it is business as usual for them with their wallet of cards and fearless use of post-tax money. The segment that works in informal sectors will have to demand payment through the bank, and learn to be compliant. Not very difficult, provided employers comply. They now have to learn the basics of dealing with a bank, pay taxes where needed, and protect their accounts and their money with the understanding about how the new system works.
Those who run small proprietary business, or earn from a profession are very used to dealing in cash. This is the segment with no service tax or business registration. It routinely bribes local politicians, police and other vested interests to stay in business. It employs people without following formal rules of engagement. It actively hides its earnings to reduce tax burden. It also suffers from lack of knowledge and expertise to set up firm accounting and finance systems.
The roadside vada-pav seller who makes Rs 2,000 a day, pays off too many people to care about paying taxes. The interior designer, the fashion boutique, the beauty salon, the small clinic, the catering contractor and so many such first-time entrepreneurs are all so used to dealing in cash that their business practices have to be modified in the new system. That will be a challenge and they will take time to rework their attitudes towards money and its accounting.
It is not unusual for many doctors, lawyers, accountants, hotels, restaurants, traders, jewellers, small businesses, shops, establishments, service providers, small-scale manufacturers, and so many such unlisted businesses to have two books of accounts. Many systematically under report revenue, using cash as the preferred medium that keeps their earnings away from the taxman. They also encourage customers to pay in cash, citing higher cost if taxes were added.
Many see themselves as hardworking business people and professionals, but they are tax evaders in practice. The thriving cash economy was something most took for granted. The argument that their hardearned money cannot be shared with the government is illegal, unlawful and indefensible. They have to begin cleaning up their finance and accounts. The law enables them to account for expenses, offers reasonable tax planning avenues, and they can bring their effective tax outgo down working within the framework of law. They have to switch from tax evasion to tax planning.
The benefits are immense. The revenue that is accounted for is in their books, enabling them to expand business with investments from other venture capitalists; they will be eligible for higher working capital limits from their banks; they will be able to borrow at lower rates based on the strength of their books; and they will be able to create assets that can be used in the future; they can pass on assets to heirs and others without any complications. If professionals and entrepreneurs are indeed smart business people, they will turn the leaf in the interest of their own business and wealth.
The rich, the super-rich and the obscenely and illegally rich including politicians are the class that is unable to make concrete future plans. The relatively small segment that has employed accountants and auditors, set up formal businesses with formal practices, and is therefore already tax compliant, is the one breathing easy. For the rest, not only has the demonetisation hit the cash hoards and sources of fresh cash but the uncertainty of the future and the fate of investments is a matter of grave concern. The looming threat of fresh government assault on their ill-gotten wealth and the lack of sympathy for their plight makes things worse. Without firm government action and policy on how these classes will conduct their affairs in future, the government risks its objectives being overturned by the devious ways of this class.
As a poor country that is chronically short of money for development, we cannot afford a system where a set of individuals decides to allocate large amounts of money to luxurious purchases. Demonetisation has delivered shock and awe. How the various segments align to the objective of eradicating black money will depend on government action and policy, the road map for which should be in the forthcoming Budget. Mainstreaming the earnings, collecting all taxes, and deploying the proceeds purposefully are all huge tasks in themselves. We have just begun and have a long road ahead.
(DISCLAIMER: Views expressed above are the author's own.)