Redesign the New Kisan Vikas Patra; introduce goods & services tax

The Budget announcement reintroducing Kisan Vikas Patra (KVP) to encourage people to save more raises valid concerns over money laundering. KVPs were scrapped in December 2011, based on the recommendations of the Shyamala Gopinath panel and other expert panels, as they were prone to misuse. The certificates were in physical form, and the holder of the certificate had the right to payment. People could invest any amount of money and no questions were asked on the source of income.

Not unexpectedly, KVPs were a huge draw and became a big source to launder money. The scheme should be redesigned before its reintroduction, with adequate safeguards to prevent misuse. These should include stringent know-your-customer norms, aimed at ensuring that people don’t use banks and post offices to channelise funds that are not kosher. Issuing certificates in a dematerialised form, capping the cash component and fixing a ceiling on the amount that can be invested in KVPs make sense, if it is not tailored for the likes of Giriraj Singh, BJP MP from Nawada, who landed in trouble after cops recovered loads of cash, dollars and valuables stolen from his house.

Small savings schemes are an expensive form of borrowing for the government, true. But inflation has eaten into people’s saving. The gross domestic savings dropped to 30.1% of GDP in 2012-13 compared to 33.7% of GDP in 2009-10. This must be reversed. Instruments such as the KVP will provide comfort to savers in the hinterland who have no access to banking, and also the middle class that is finding it tough to adjust to a period of negative real returns on a clutch of savings instruments. It will also help wean savers away from investing in an idle asset like gold.

KVPs will not be seen as a disguised amnesty scheme to launder black money, if the Centre and the states swiftly adopt the goods and services tax. With an audit trail of value addition and income across the production chain, GST will help curb black money. It will create a unified database of tax potential that can be tapped both on the direct and indirect tax sides, and improve compliance.