A foolproof system to prevent tax evasion and destroy the black money economy - An Ethmos perspective - PART II

In our previous article (click here to read the same), we had proposed the root cause of the black money economy in our country, which is nothing but the HARD CASH being utilized so rampantly in our economic system without any system for tracking the same.  In this second part, we will discuss about how the corruption in the "general public systems" is leading to tax evasions and ultimately the creation of black money in the economy.  "General Public Systems" include both the general public (including individuals, proprietors, partners, companies, etc.) as well as all the concerned government/semi-government and private departments/firms.  Since the topics are a bit complex to clearly understand by the general layman public, we will explain the same using some examples.  We also recommend our readers to go through our article on financial trail reports to get a better understanding of the subject:

Example 1:  Under-billing of transactions

As mentioned in our previous article, every transaction that takes place in cash has the potential to be "under billed" by the person doing the same.  For example, if you are purchasing any item worth Rs. 200/- and if you are not taking any bill (which is the case with most of the grocery stores or small shops in majority of the localities) or taking only part-amount bills, say for items of only Rs. 100/- instead of Rs. 200/-, then chances are there that the person getting the money will not account the same in his income leading to nonpayment of all types of taxes including income tax, sales tax, VAT, etc. and thus increasing the corpus of black money in the economy.

Example 2:  Billing of the transaction but not accounting the same in tax returns

There is also a possibility that a shopkeeper or a supermarket owner who has sold items worth say Rs. 3000/- on a day and is having computerized billing facility in his shop.  The computerized bills will be provided to the customer for the full amount but after the business hours, the bills in the database can be deleted manually so that the total receipts of say Rs. 3,000/- can be changed to Rs. 2,000/-.  But then the question arises, how will s/he account for the Rs. 1,000/- difference in his stocks kept at the store.  This difference of Rs. 1,000/- is shown as wastage of stock during transit or environmental conditions, etc., and is written off as losses in the books of accounts of the shopkeeper.  This leads to a dual benefit of not paying a single penny of tax for Rs. 1,000/- plus claiming lower profits and thus paying still lower taxes to the government.

Example 3:  Under-billing of goods in transport

Many a times people export their goods from one place to other; say a textile merchant in Gujarat sells goods worth of say Rs. 10 lacs to another wholesale dealer in Tamil Nadu or Karnataka.  The truck or vehicle in which the goods are sent show the value of the goods as say Rs. 1 or 2 lacs only instead of Rs.10 lacs and the excise duty is also paid for the same value, which leads to enormous tax evasion and erosion to the exchequer.  As already mentioned, the undervaluing of goods result in declaration of only 10% to 20% of the actual value of transaction resulting in loss of income tax and sales tax to the government while the businessmen make merry with the excess amount stashed in various places.  Even the transactions are also done in the same way, i.e. only the billed amount is taken as cheque or account transfer while the "unbilled bill" is taken in the form of cash.  If the same transaction is done for international export transactions, the actual loss to the exchequer is double since there is also loss of the crucial foreign exchange that the country was supposed to get.  Also, there are also "pseudo export" transactions wherein export is only shown on paper so as to get the export subsidy and nothing of value is actually exported out of the country.

These aforementioned examples are only some of the "hypothetically real" ("hypothetical" because there is no concrete proof to prove it until and unless someone goes and seriously investigate these matters and "real" simply because it is actually happening in reality) situations that we have mentioned to just give you a rough idea as to how the black money is generated in our country.  Now what is the solution to this?

Solution by the Nobodys of Ethmos

The "Nobodys" of Ethmos offer the following solution, and as with all our solutions, this too is very very far fetched and requires very high level of commitment from the masses, classes, and the government to implement - BUT if implemented, then black money will be history.  Please note that this is apart from the M2 machine that we had discussed in our previous article. So here goes:

1.  Make a central electronic transaction database (CETRAD as we can fashionably abbreviate it!).  All the dealers or shopkeepers or anybody carrying on any sort of business in the country need to use this mandatorily and no other billing software has to be used.  The bills generated by this software SHOULD ONLY be given to the customer and no other bill in whatsoever form given will be considered as invalid and given with fraudulent intentions to evade tax unless proved otherwise.  The software should be made available both in the form of a computer program as well as mobile-based application.  Those not having a smartphone should better purchase one if you want to carry on business in the country!  Any sale made by the businessman needs to be entered into this software either on the computer or on the smartphone - regardless of whether a bill is issued to the customer or not.  A functionality of automatic mobile message to the customer can also be enabled in the system provided the seller enters the mobile number of the customer while doing the data entry of the bills.

What purpose it will serve?

a.  Nobody will be able to hide his/her sales transactions anymore.

b.  The government will get a clear and correct estimate of the actual GDP (Gross Domestic Product) of the country which is nothing but the total production of materials and services in the country.

c.  Since the transaction has come to the knowledge of the government, the seller needs to pay all the applicable taxes including but not limited to sales tax, income tax, VAT, and if applicable, wealth tax also.

The access to CETRAD should also be given to the general public.  Why?  Say for example, you purchased items worth Rs. 2000/- from a supermarket.  The Rs. 2000/- will be including of the VAT/Sales Tax of say Rs. 190/- and the Sales Tax Registration number will be printed on the invoice given by the supermarket.  Now, if you want to ensure that the tax that you have paid to the supermarket is actually going to the government, all you need to do is to put the Sales Tax Registration number of the supermarket in CETRAD and get the details of the transaction on that particular date regarding whether the tax has been remitted or not and if not, then the same can be informed to the concerned department through an easy interface functionality in the CETRAD website.

2.  OPOF & EUL - One Person One Firm concept AND End-use of License concepts
Our economics textbooks tell us that we have liberalized our economy in 1991.  What this actually means is that now it is comparatively easier for any person to get a business license and set up a business.  But this "liberalized approach" is being used by many "good" businessmen to hide, under-report, divide, and divert their real business incomes and ultimately pay less to the government exchequer.  For example, take an example of a person involved in a service industry of say providing tax consultancy or any other service (you can name anything!).  The person takes a license in the name of a firm M/s ABC for which he will be the proprietor.  Then he opens another firm in the name of his wife called M/s XYZ.  The wife will not be knowing how to spell the word TAX but the income of the husband will be diverted to the wife's firm and all the necessary taxes (just to the barest minimum!) will also be filed in his wife's name so that the genuineness of the firm is maintained and he can take a loan from any financial institution in the future if he needs one by clubbing the income of his wife with his own income to show inflated income levels.

There are also examples, where the same person takes licenses in the names of M/s ABC, M/s DEF, M/s GHI, etc. etc. and does rotation of money within these firms and files the microscopic minimum of tax that he is supposed to pay.

So, in order to curb these practices and to get the real dues of the government we propose the OPOF concept - one person one firm - no person should be allowed to open another firm IN THE SAME LINE OF ACTIVITY without prior approval from the competent license giving authorities and the reasons given should be genuine (a proper record of such approvals need to be maintained and the records should be subjected to internal departmental audit, CAG audit, as well as external audits to prevent misuse of this facility).  Such approvals should not become the order of the day and be given on a day-to-day basis but given with utmost use of prudence and judgment on the part of the license issuing authorities and they will be held personally responsible for any lapses in the same.  Implementation of this scheme will prevent rotation of money among the businessmen in their own sister concerns/associate concerns and will lead to correct accounting of income.

The second thing that we proposed was the "EUL" or the End-use of License concept.  There is a rule in banking called "End-use of funds."  Whenever any loan is given to a person, it is the fiduciary responsibility of the banker to inspect and certify that the funds have been utilized for the said purpose given in the loan application (for example, a loan taken for agricultural purpose cannot be utilized for purchasing a flat).  This is a very crucial monitoring tool wherein the utilization of money is monitored to ensure undue inflationary pressures on the economic system.  The same concept has to be generalized for ALL THE GOVERNMENT DEPARTMENTS.  For example, a municipal authority who is issuing the trade/gumastha license to any shopkeeper or businessman has to ensure that the person who has taken the license has actually opened such a shop and is actually doing the  business as indicated in his license application.  This will curb the practice of some of our "intelligent" businessmen from opening firms in the name of their wives and portraying their "housewife" wives as women of high business acumen independently running their own businesses.  Of course, there are genuine cases also wherein women do their own business and that is the reason why a proper inspection and monitoring of the issuing licenses is required in order to curb the malpractice of diverting the business income in the name of one's spouse.  The license issuing authority has to regularly conduct field inspections and surprise visits to all the units at least once in a quarter and ensure that business is actually run in the premises as per the law and the person running the business is the person in whose name the license is issued.  A quarterly certificate regarding the same should be taken from the license-issuing authority.

Whew....that was tiring, but friends, this is another utopian dream that we are seeing and making you all see but just give it a thought for a while as to how our country will be changed once the same is implemented.  Even by all conservative estimates, if the domestic black money is tapped in, may be you never will have to pay a single ruppee for payment of your medical bills for your near and dear ones.  We are doing it for all of us and let this message reach each and every one, from the person on the streets to the person on the highest echelons of power corridors of Delhi.

Jai Hind & Happy Ethmos to all!