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Wednesday, November 9, 2016

Use unaccounted wealth to improve education

Another surgical strike happened yesterday. The Government of India has declared the Rs. 500 and Rs. 1000 notes will no longer be legal tender in the country. This is huge amount of money. Different newspapers are giving different figures, but they vary from Rs. 6 lakh crores to Rs. 9 lakh crores (6-9 trillion rupees). Of course, people and organizations who are holding this cash can deposit this money in the bank over the next 50 days, but if the money was unaccounted for, it could lead to questioning by Income Tax authorities. Most people are estimating that a significant part of this cash is unaccounted for. Of course, over the next 50 days, the financial experts will try to find ways to deposit the money in bank or get it exchanged with valid currency, but it is pretty obvious that a very large amount, in trillions of rupees, will be worthless very soon.

Will burning these notes be the only solution?

I have a suggestion. What if the government allows these people to "donate" these notes to educational institutions (who have been given tax exempt status for donations) and allow educational institutions to deposit any amount of such donations in the bank. These people who donate money can then be given a receipt which they can use to claim tax deduction.

If someone has 1 crore worth of unaccounted for currency notes, he will have the following options:

1. Give this money to an educational institute anonymously. He may feel nice that his ill gotten wealth is helping the nation in some way.
2. Give this money to an educational institute, get a receipt, show that receipt in his income tax return and get a tax saving of 30 percent (or 15 percent, depending on the educational institute). The person still loses 70 percent of the money, but again, he may feel nice that instead of destroying those notes, they are of some use in nation building.

Depending on whether someone is willing to show that money or not, they can chose option 1 or option 2.

Of course, one could consider other priorities and allow a broader set of organizations to whom such donations can be made. Since in some cases, this can become a conduit to exchange the old notes with new (you donate, and then you get a contract or some other goodie), government may decide that only government institutions will be permitted to accept such donations.

Just imagine what it can do to education.


Bhaskaran Raman said...

Given the number of real estate specialists running "educational" institutions, I'm afraid this will negate quite a bit of the intended benefits of this move.

Aseem Kumar said...

Could this lead to kickback schemes by plethora of private institutions some of which might be tax-exempt ?

Dheeraj Sanghi said...

@Bhaskaran, that is why I am suggesting that the Government allows only government institutes.

Dheeraj Sanghi said...

@Aseem, so no private institution.

Akshat Mathur said...

If going anonymous was the plan then the Government would have already given them the chance to submit their money anonymously to the bank, as you mentioned government Institutes only-both way money eventually will go to Government treasure.

And if giving such a big amount of money for charity were nice to them,they never have earned thier money that way.
Anyways Sir your Idea is nice!

Subrata Lahiri said...

A novel idea. However, it is worth mulling over the ethical aspect of this 'proposal' inasmuch as nobody should be allowed to get away with ill gotten wealth irrespective of the manner in which it is now disposed of or regularised. After all the Govt. had recently given its citizens a window for declaring undisclosed money, & those who failed to avail of this opportunity should not be spared at this stage lest it should send a wrong message about the Govt.'s resolve to root out corruption.

Maybe if the Govt. had incentivised donations to educational institutions at the time of launch of the amnesty scheme (say by way of additional tax concessions), the donee institutions would have benefited to some extent.

Dheeraj Sanghi said...

@Subrata Lahiri, If the owner burns the cash, the government will not be able to find him anyway. So there is nothing like allowing someone to get away or sparing them. In the previous scheme, the person was allowed to keep 55%. This proposal is saying that many people would actually donate anonymously since they don't want to be known as big donors in this period of cash. And if the person is willing to be identified (which wasn't the case in the IDS scheme) then the person can keep 15-30%. So ethically, if the first scheme was ethical, this is only "tighter" than the previous scheme - your identity gets known and yet you get to keep only 15-30%.

Subrata Lahiri said...

A bonafide donor would have no problems anyway in contributing to the coffers of educational institutions. However, for those with unaccounted wealth that had not been disclosed earlier (even though an opportunity had been provided to them by the Govt. for this purpose), opening a window to such people now to donate anonymously would defeat the Govt.'s intent of nabbing the tax evaders. In fact, from the recent statement of the Finance Minister, it is clear that the Govt. is actually on the look-out at this stage for those whose cash deposits are disproportionate to their known sources of income. I am sure you will agree that this approach is in the interest of the nation, as it is high time that the corrupt were taken to task through whatever means are available at the disposal of the authorities for this purpose.

Given the above scenario your proposal may not be practically implementable at this stage notwithstanding its merits, & the spirit behind it. If however, the Govt. should legitimize such transactions by way of permitting donations to educational institutions now (as suggested by you), though not anonymously, it would indeed be a very welcome step. Until this happens, tax evaders may prefer to lie low and simply burn their unaccounted wealth (Rs. 500 & 1000 notes in this case).

I would, however, like to applaud you for your out-of-box thinking, and I sincerely wish that the Govt. makes a special dispensation in future for educational institutions (in line with your suggestions) while mopping up undisclosed money.