It is natural for the government to monitor the flow of black money into the economy and take measures to curb it.
In relatively more mature economies, full care is taken to bring the most productive activities under the tax net so that there is no scope for tax evasion or tax evasion.
But this should be done in a transparent and effective manner so that common people and taxpayers do not face any kind of inconvenience.
The current Indian administration has said many times that it wants to protect taxpayers from harassment or excessive interference.
In this direction, the government has also taken several steps including faceless taxation. But recently two such occasions have come which show how quickly the government deviates from the direction of reform.
The recent Reserve Bank of India (RBI) notification regarding the Rs 2,000 note is the first such example.
The RBI had said last week that Rs 2,000 notes would be withdrawn, though they would remain valid.
Although this latest move has nothing to do with the demonetisation announcement made in 2016, it brings back memories of the chaos that erupted at that time.
Ever since the announcement of withdrawal of Rs 2,000 notes has been made, many people are not able to understand how to exchange the notes they have.
Such news are also coming that shops and establishments are refusing to take them.
RBI Governor Shaktikanta Das has to take initiative to remove fear from the minds of the people.
The central bank has said that the purpose of issuing Rs 2,000 has been met and its ‘time limit’ has also expired, but the initiative could have been done without any specific notification or the ‘cut-off date’ of 30 September.
Therefore, there is little doubt that minimization of cash and high value cash transactions was one of the objectives of this initiative.
But the government failed to take into account the impact it would have on common Indians like demonetisation in 2016.
A few days back, the government has made some changes in the Liberal Remittance Scheme (LRS).
It seems that the government has not acted with the same understanding as in withdrawing the Rs 2,000 note.
Under the LRS, Indians can remit up to $250,000 in a year abroad for investment or other special purposes.
Now the government has decided to raise the level of tax deducted at source for such transactions.
This rule will also apply to international credit card transactions. There was a lot of opposition to this move of the government, after which it has softened its stand.
The government has said that payments below Rs 7 lakh will not attract the 20 per cent withholding tax.
It is not yet decided how this limit will be enforced as details of real-time expenditure by an individual are rarely available.
Though such taxes would be adjusted in the year-end tax bill of the person concerned, it would lead to huge paperwork and compliance burden.
Bringing the parties involved in business expenditure under the ambit of tax deducted at source will also cause unnecessary trouble.
In particular, this will increase the burden for the owner or employees of relatively small enterprises.
It is clear that the government’s move is aimed at increasing tax collection and monitoring without setting up a better system.
If the government makes a concerted effort to keep track of transactions in real time, it will prevent tax evasion and money laundering.
To avoid the embarrassment of having to explain its actions again and again, the government should discuss in advance the effects of its decisions on the citizens.
A proper tax administration has to pay more attention to the concerns of taxpayers and understand their problems.
