Fruitless pursuit of black money
People curious to know the amount of “black money” stashed by Indians in foreign banks may be in for yet another disappointment after the Supreme Court monitored Special Investigation Team (SIT), submits its findings. After six months in office, the Narendra Modi Government has not been able to lay its hands on anything other than a list of Indian account-holders, numbering in all 627, in HSBC Geneva, which the previous Manmohan Singh government had obtained. No other reliable information has been dug out since by the team, thus rendering the efforts of the most intensive and high-level probe fruitless. That there are no Congressmen among the account holders has left the Government red faced and the whole exercise may turn out to be farcical.
The Government is sceptical about recovery of huge amounts from the 350-odd Indian whose names figure in the list and who could face penal action, because their accounts are too old, or hold little cash. The rest are non-resident Indians (NRIs) who cannot be prevented from opening accounts with their earnings abroad. The Government may not be able to fulfil its promise to the electorate to bring every rupee of black money kept abroad to enrich its coffers with any seizures. The SIT may actually have to wind up its work without producing any set of recommendations — other than those it has already done — to check generation of black money and its illegal transmission to other countries and tax havens.
The Finance Ministry presided over by Mr. Arun Jaitley took the plea before the Supreme Court that it was next to in possible to obtain all the names of black money holders abroad due to the double tax avoidance agreements India had signed with many countries which forbids transmission of such information and its being made public save in exceptional cases. For instance, non-signing of such a treaty with the United States would impact adversely on the Indian economy. Should India refuse to sign such a treaty, then the US would charge 30 per cent of every legitimate remittance to India as withholding charges. Exports would suffer as most dollar transactions and letters of credit are routed through the US.
However, the 100 account holders, who were served notice by the tax authorities have paid penal tax to the tune of Rs 200 crore, while the rest have either denied ownership of these accounts in their names, or decided to fight it legally. In case they too decide to pay tax, the realisation will amount to no more than another Rs 200 crore. These are very small sums, considering the amount of black money stashed in foreign banks, as some estimates are astronomical, based mostly on guesswork. The insinuation that the UPA and the BJP Government are hand-in-glove to protect such account holders, many of whom may be their supporters, is ridiculous. It is not illegal to keep money in foreign bank accounts for business or other purposes as long as taxes are paid on it.
Estimates of black money vary and the Finance Ministry’s think tank had put it at Rs 36,000 crore way back in 1984. The Global Financial Integrity estimates that Indians have moved $ 644 billon to tax havens in 2011, but Prof Arun Kumar, after analysing date on trade flows, has put the figure at $ 2 trillion, which is more than India’s current GDP. It is said that India ranked third in the world for money illegally moved overseas. But sharing of information on black money is governed by India’s tax related pacts, including Taxation Avoidance Agreements and Tax Information Exchange Agreements. India has also joined the Multilateral Convention on Mutual Administrative assistance in Tax Matters and the SAARC Multilateral Agreements.
The Global Financial Integrity says that India’s outflows increased steadily and dramatically during the last decade, ending up at $ 84 billion in 2011. It estimates such flows on the basis of two sets of data globally, changes in external debt and trade mispricing. For India, the entire illicit outflow is through trade mispricing. The modus operandi is by now well-known; an importer declares a higher import value to the customs authorities than the value of goods recorded by the exporting country. Similarly, an exporter under-states the value of goods exported in relation to imports recorded in the importing partner country. In both cases the balance of funds in kept abroad, to avoid heavy taxes in India. The money thus kept in safe havens escapes tax and can be used for trade and investment purposes and building assets abroad without having to get large sum of money out of India, which is very difficult, despite the liberalised foreign exchange remittance rules, which have now been so tightened as to make them useless.
But these estimates may also not be true, as trade mis-invoicing in services, same-invoice trade invoicing, hawala transactions and dealings covered in bulk cash are not covered. Much of the proceeds of drug trafficking, human smuggling and other criminal activities, which are often settled in cash, are not included in such estimates. It is said that a trillion dollars flowed out illegally form developing countries in 2011. The biggest outflow was from Russia ($191 billion); China ($151 billion) and India ($ 85 billion). Two regulatory and one governance related factors are said to propel this continuous drain of resources from the developing world. These are export proceeds surrender requirements and capital account openness, both of which are driving up trade mispricing. The government-related factor is corruption; the more corrupt a country, larger are the funds that flow out illegally. The outflow does not seem to have stopped, despite the mega scams like 2G, coalgate, Jharkhand mining and others, which are before the courts and have restarted economic development, as the Finance Minister himself has admitted.
As the hunt for black money in foreign banks is proving futile, the Government is being advised by many economists to concentrate, instead, on black money generated in India, of which that stashed abroad is only a small part. Much of the black money in India is said to be in the real estate sector, illicit mining and diamond trade, apart from corruption at every level of government, from the lowest to the highest. Bulk of the thousands of crores spent by politicians on electioneering are black money, though they swear heaving adhered to the Election Commission’s ceilings. Each election to the Lok Sabha, or state legislatures cumulatively generated something like Rs. 30,000 crore from unknown sources. Many leaders brazenly use aircraft provided by big businessmen for electioneering without paying for them, or showing such journeys in their expenditure accounts submitted to the Election Commission.
It has been suggested that to regulate real estate transactions, all dealings should be made on line and all payments for buying and selling should only move through banks. Current rates for real estate transactions are : “fifty per cent white and fifty per cent black”, and for smaller property, the entire transaction takes place in cash. Almost 90 per cent of retail trade in India generates black money as all transactions are in cash with no receipts and with huge margins. The professional class — lawyers, doctors, middlemen — make the bulk of their earnings in cash on which no taxes are paid, except for a few honest people. For decades, there is talk of bringing more people under the tax net but all such efforts are frustrated by a dishonest tax administrators. Many of the officers are hand in glove with tax dodgers. Instead, the authorities are chasing black money abroad as a mirage, just to derive political mileage from election to election.
The special Investigation Team (SIT) headed by retired Supreme Court judges M.B. Shah and Arijit Pasayat has made several recommendations like-redrafting the Double Taxation Avoidance Agreements, audit by Comptroller and Auditor General of suspicious exports and speeding up investigation in pending tax evasion cases. It also wants Prevention of Money Laundering Act and Foreign Exchange Management Act amended to introduce seizure of value equivalent to the assets or funds stashed in foreign banks. It has recommended tax evasion as a predicate offence under PMLA, which attracts stringent punishment.
While critical of the lack of coordination among various enforcement agencies, it has directed the Income Tax Department to give access to 360 degree data profiling facility to Customs and Central Excise to detect tax evasion cases. It has also put a time-frame for completing cases of income tax, excise and customs and directed the Income Tax Department to introduce a new column in the return forms for disclosing foreign bank accounts in past eight years and scrutiny of those years.
The task before Narendra Modi is to make all eligible people pay taxes and the tax administrators to turn honest and not encourage generation of black money and tax evasion. If both these things happen, the Government’s revenues would record a four-fold jump and enough money will e available for development and making India a truly rich country.
