In democracy, there is a need for gap fillers in the huge space between citizens and the state. American sociologist Morris Jones argued that NGOs and trade unions will have to act as fillers of the space between the state and the citizen. Local bodies are also now constitutionally part of participatory governance. The cooperative movement grew in a geographically skewed manner with states in the western region, Kerala and Tamil Nadu standing out as exceptions. The cooperative movements conceived legislatively by the British regime in 1912 acted not only as useful tool of citizens' participation but also as gap filler in the space left by the corporate banking sector. It took considerable time for banks to come under government control (1969) and recognize priority sector goals, especially after 1970s.
Conceptually, the cooperative sector is something which is to be considered "own" by the local people. Cooperators are to be persons who knew borrowers and their financial needs intimately, thereby facilitating need-based lending sans red tape. As in the case of panchayats, where fears of elite capture were expressed by eminent personalities like Dr B.R. Ambedkar, there are now apprehensions that cooperative societies are no longer participatory forums, but hotbeds of narrow political rivalry. It is also opined that incentives given in the taxing statute are being misused for parking money not offered for taxation, nicknamed "black money'.
Leading cooperators feel that enforcement agencies and banking supervisors totally lack a perception of the historic role of the cooperative movement and emotions attached with it. It is this movement that brought the banking habit in rural areas when commercial banks hardly bothered to tread in those areas and kept the usurious moneylender away from squeezing the poor and the needy. They strongly feel that by terming them cooperatives as 'havens of undisclosed money' the move is to malign them and create panic among small-time depositors. As a consequence, they feel, it is usury and penury that would stalk the space, hitherto occupied by the cooperative movement.
Taxmen, on the other hand, are equally strong in their opinion. They say that they have the judgment of the Supreme Court on their side and they are empowered to collect information about those who deposit money in cooperative banks. They opine that attempts to resist their efforts to collect this information by visiting cooperative societies tantamount to challenging the law of the land. Taxmen also state that quite a large sum of unaccounted money is deposited in cooperative societies. Let us see how the law stands on this issue. Any banking company, including a cooperative society doing banking business, falls under the Banking Regulation Act 1949, and is subject to the supervisory control of the Reserve Bank of India. The main purpose of this supervisory control is to ensure solvency of banking institutions.
These institutions are also covered by the Know Your Customer (KYC) norms in accepting deposits. Enforcement agencies such as Income Tax department can verify the source of deposits, if necessary. There is also a mechanism to deduct tax at source on interest payments on deposits in a commercial bank and time deposits with cooperative banks. But a large part of the cooperative sector falls in the category of primary credit societies, outside the purview of these regulations.
The primary agricultural cooperative societies, by their definition, accept deposits from their members and lend to them and per se do not fall in the definition of banking business and therefore not covered by the Banking Regulation Act or by RBI's supervisory control.
They are also outside provisions for tax deducted at source of the Income Tax department. This exemption from tax provisions has been provided by the legislature as an incentive to agricultural lending and borrowing, given inadequacies in banking coverage in the country. On forming an opinion that a part of the deposits is not related to purposes or objects of these societies, the tax department has taken up the task of collecting information about deposits over a threshold limit made in these societies. Attempts made by the tax department to bring the profit of these societies into tax net has met with failure, as Kerala and Chennai High courts have decided that their profits cannot be taxed. At the same time, the taxman has been successful getting an apex court judgment, enabling them to collect information on deposits. This being so, there needs to be an honourable arrangement in exercising powers within the constitutional framework to collect information on deposits above a threshold limit. Bringing deposits made under KYC norms and reporting needs consideration.
Societies can be networked to their registrar's site and information can be shared with the taxman online, avoiding field visits and panic if any, as a result of this. Selective and effective inquiries based on this information can be conducted to purge unaccounted money, if it has entered the cooperative system, like it has entered so many other sectors not excluding the formal banking system. The recent issue of note exchange facility by the cooperative sector has already gone to the judiciary. It would be better if conciliation can happen here also with usual safeguards. In efforts to deepen democracy, the cooperative movement played its role and still has, and the ills, if any, afflicting it needs to be cured. The aim is to make sunlight fall on any dark areas. Information is the best tool and sunlight is the best disinfectant. Doors should be opened up for non-intrusive information-sharing and selective action which would avoid panic among genuine depositors. This seems the need of the hour.
(The writer is a commentator on issues of Indian federal polity).
