Anti-Black Money Day: Dear PM Modi, Is the Govt Really Serious About Tackling Black Money?


The Bhartiya Janata Party (BJP) led National Democratic Alliance (NDA) government will celebrate November 8, as the anti-black money day. On November 8, last year, the Narendra Modi government had demonetised Rs 500 and Rs 1,000 notes. This was seen as an attack on the huge amount of black money in the Indian financial system.

In the end, it turned out to be a legal money laundering scheme and nothing else.
After demonetisation, the prime minister Modi has continued to maintain a stance against black money in almost all his public posturing. All this posturing reminds me of a line from the Salman Khan starrer Wanted: “Ek baar jo maine commitment kar di, phir main apne aap ki bhi nahi sunta (Once I have committed to something, then I don’t even listen to myself).

Nevertheless, how serious is the Modi government and the prime minister himself about tackling the black money menace? Recently, the prime minister was in Gujarat and in a bid to reach out to the traders who have conventionally supported the BJP in the state, over the few decades, he said:In the last few months, 27 lakh additional people have registered themselves for this indirect tax [i.e. the Goods and Services Tax]… No businessmen wants to indulge in tax evasion. But tax rules, system, tax officials and even politicians are forcing them to do it…I know, that those who are joining have fear that their past records will be checked. I assure you that no tax officials will be allowed to open past records of those who want to come in the mainstream.”

What is the prime minister saying here:  A bunch of people have been afraid of coming on to the Goods and Services Tax system because the declarations they make now and in the months to come, will give the government a good idea about the kind of money they were making in the past. The government also has the details on the kind of tax they have paid in the past [if at all any]. Hence, it is clearly in a position to estimate the total amount of taxes that were not paid in the past.

The prime minister was simply trying to assure the people of the state of Gujarat that the past records will not be checked and they won’t get tax demands from the government.
This assurance raises a number of questions:

a) Does the law of the land change, simply because there is an assembly election in the state?

b) Is the commitment to eliminating the black money menace limited to only those states and only those times, when there are no assembly elections happening?

c) Also, does this mean that tax officials are supposed to turn a blind eye to the past shenanigans of people who should have paid tax, and haven’t, because the prime minister has made an assurance during the course of an election speech?

I have always maintained in my writing that prime minister Modi and the BJP aren’t serious about eliminating the menace of black money. And this is one of the things they like to talk about to build a narrative around the point of the government being serious about eliminating corruption and black money. The voters like to hear such things and the politicians are giving it to them.

Let me explain this point in a little more detail. You and I have been getting emails and smses almost every day asking us to link our Aadhar card to our bank accounts. We have also been getting smses asking us to link our Aadhar card to our mobile numbers. It is almost impossible to carry out any transaction with the government without an Aadhar card.

At the same time, no identification is needed to donate money to a political party. Why is that the case? Why can’t the Aadhar card be linked to every donation made to a political party as well. What is stopping the government from doing that? Almost everyone has an Aadhar card now.

If the idea is to eliminate black money, why aren’t donations to political parties linked to Aadhar. In fact, to take this argument even further, why are political parties allowed to collect donations in cash, in this day and age. If the idea is to encourage digital
transactions, why can’t PM Modi and the BJP, set an example on this front and ensure that the BJP takes only digital donations.

A lot of the donation to the political parties at the state level comes from the builders and the real estate companies. Because these donations are made in cash, builders need to carry out a part of their real estate transactions in cash as well. (This is not to say that all the cash that they collect is handed over to politicians unless of course the builder is a politician himself).

To conclude, there is enough evidence to suggest that PM Modi and the BJP are not serious about tackling the black money menace. If they were they would first start with genuinely reforming political donations.  And this leads me to believe that tackling the black money menace, like many other things, is just another talking point for PM Modi and the BJP.

(This was just a glimpse. If you want to know how big the black money problem is in India and how we can tackle it, there is a long chapter in my book India’s Big Government. The good news is that the book is available at a huge discount on Amazon till Friday, 27th October. The Kindle version is going at Rs 199, against a maximum retail price of Rs 749, and the paperback is going at Rs 499, against a maximum retail price of Rs 999).

The column originally appeared on Equitymaster on October 26, 2017.

Tackling black money

indian rupees

Vivek Kaul

One of the promises made by the Bhartiya Janata Party(BJP) before the sixteenth Lok Sabha elections was that it will get back all the black money that has left India over the years. This issue really caught the imagination of the voters. After coming to power, the party and its leaders have reiterated that they are still committed to getting back all the black money that has left the Indian shores.
Nevertheless this remains a difficult task given that the money is spread across tax havens all over the world. The economies of tax havens operate on all the money that is stored in their bank accounts, and so they wouldn’t be exactly be bending over their backs to hand over the money back to India. Also, the government needs to decide whether such an operation is feasible or are there better ways of looking at the situation like tackling the black money problem at home rather than trying to get back all the money that has left the Indian shores.
Before we get any further it is important to define what black money is. A ministry of finance white paper published in May 2012 suggests that “There is no uniform definition of black money in the literature or economic theory.” It then goes on to define black money as “ as assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.”
In simple English this is money which has been earned but not been declared as an income and hence, no tax has been paid on it. This is precisely how the National Institute of Public Finance and Policy (NIPFP) had defined ‘black money’ in its 1985 report on Aspects of Black Economy. The NIPFP defined ‘black income’ as ‘the aggregates of incomes which are taxable but not reported to the tax authorities’.
Black money is generated from a variety of transactions including criminal activity. Nevertheless a major portion of black money is generated through legal activities. The ministry of finance white paper points out a number of reasons as to why people do not declare their entire income. “For example, a factory owner may under-report production on account of theft of electricity which in turn leads to evasion of taxes…Sometimes the procedural regulations can be such that complying with them may increase the probability of further scrutiny and thereby the incidence of the burden of compliance, creating a perverse incentive not to report at all and remain outside the reported and accounted proportion of the economy,” the report suggests.
Of course, this leads to under-declaration of income and lower tax collection by the government.
Further, sometimes culture and social practices also play a role “in deciding the preferences of citizens between tax compliance and black money generation.” In a country where not declaring income is a norm, generating black money may be totally acceptable. India fits this perfectly, with only 3.5 crore individuals out of a population of 120 crore paying taxes.
So, how does the country get rid of this menace? There are no easy answers to such a complex problem. Nevertheless, there has to be a starting point. The finance ministry white paper calls “for political consensus as well as patience and perseverance”.
The political consensus is the starting point. But are the Indian political parties really interested in weeding out black money? The answer is no. Allow me to elaborate.
A study carried out by the Centre for Media Studies sometime in March this year suggested that around Rs 30,000 crore would be spent during the 16th Lok Sabha elections which happened in April and May 2014. Of this amount the government of India would spend around Rs 7,000-8,000 crore, the study suggested. The remaining amount would be spent by candidates and their parties.
Candidates are allowed to spend Rs 70 lakh for fighting a Lok Sabha election in bigger states. For other states the amount varies from Rs 22 lakh to Rs 54 lakh. While officially candidates stay within this limit, unofficially they spend a lot more money, as news reports appearing around election time often point out. The question is where does this money come from? A major part of the Indian elections are financed through black money. Some of this money is essentially black money coming back to India from abroad, particularly from places like Dubai. This money is routed back through the hawala route.
Further, the money that politicians earn through corruption finds its way into real estate. Many real estate companies are essentially fronts for the ill-gotten wealth of politicians. Hence, are the politicians willing to disturb the status quo on this front? Are they willing to carry out reforms in the process of election campaign finance? Or it too lucrative an opportunity to let go of?
A serious effort of tackling black money problem will mean looking into real estate transactions, which generate a significant portion of black money in India. The finance minister Arun Jaitley recently talked about making Aadhar cards compulsory for real estate transactions. While that is a good move, there are certain underlying distortions that need to be set right in the real estate sector, which comprises of close to 11% of the Indian GDP.
The stamp duty to be paid on real estate transactions is close to 5% in many states. This leads to individuals under-declaring the value of the transaction when they are selling the real estate they own. Over and above this there are other transactions costs of searching for a property, registration, commissions to be paid etc. These small things are that need to be improved, if the “real estate” sector is to be made more transparent.
Further, when a fresh purchase is being made from a builder, he usually insists on a significant portion of the total deal value to be paid in cash. This is understandable given that builders are usually fronts for or in partnership with local politicians and politicians cannot be declaring their real incomes.
To conclude, if the black money menace has to be tackled in India, the politicians need to clean up their own acts first. Everything else is just noise.

The column originally appeared in The Asian Age/Deccan Chronicle with a different headline on Nov 8, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)