What the Media Did Not Tell You About the Black Money Scheme


The Income Declaration Scheme(IDS) which ended on September 30, 2016, led to the declaration of Rs 65,250 crore of black money. Black money is essentially money which has been earned but on which taxes have not been paid.

The declarations will be taxed at the rate of 45 per cent and hence, are likely to net the government Rs 29,362.5 crore, over the next year. Half of this amount will have to be paid during the course of this financial year by March 31, 2017. This basically means that the government will get Rs 14,681.25 crore, in this financial year. The remaining amount has to be paid by September 30, 2017.

The media, as usual, has gone on an overdrive, highlighting the success of the scheme. One comparison that has been made is with the Voluntary Disclosure of Income Scheme(VDIS) of 1997, the last black money declaration scheme offered by the government.

The October 2, 2016, Mumbai edition of The Times of India ran a graphic around this on its front page (given the number of advertisements that appear before the front page these days, one can hardly call the front page a front page these days). This graphic essentially said that the Income Declaration Scheme of 2016 has been 3 times bigger than VDIS of 1997. The logic for this is very straightforward. The total amount of black money declared under the VDIS 1997 was around Rs 33,000 crore. The tax collected on this at the rate of 30 per cent amounted to around Rs 10,000 crore.

The tax to be collected in the Income Declaration Scheme is three times at close to Rs 30,000 crorer. An editorial in The Economic Times published on October 3, 2016, states: “This is three times as much as the revenue garnered from the amnesty scheme of 1997.”

The trouble with this analysis is that it is very simplistic. The Indian economy now is significantly bigger than what it was in 1997-1998. The nominal GDP (a measure of the size of the economy) was 9.4 times bigger in 2015-2016 in comparison to 1997-1998. But, the total amount black money declared is only 2 times more (Rs 65,250 crore now in comparison to Rs 33,000 crore then). The tax collected is likely to be three times bigger.

Shouldn’t these basic factors be taken into account before declaring that tax collections are likely to be three times bigger? Also, the total number of declarants of black money in 2016 are 64,275. As per this Outlook story, the total number of declarants of black money in 1997 were 4.7 lakh.

The number of declarants in 2016 are way fewer than 1997, primarily because the black money declarations are now being taxed at 45 per cent against 30 per cent earlier. If the tax on the black money had been fixed at 30 per cent, the total number of declarants would have been more.

The trouble is that once we take all these factors into account, then the situation no longer remains simplistic. And once the situation is not simplistic, straightforward headlines which newspapers specialise in become difficult.  After taking all these factors into account, it is not so straightforward to say that the tax collected is three bigger.

Another factor that the media missed out on is the rise of the services sector as a part of the overall economy. The share of the services sector in the GDP has risen from 47.5 per cent in 1997-1998 to 59.93 per cent in 2013-2014.

As Arun Kumar points out in The Black Economy in India: “The services sector lends itself to black income generation since a) valuation of activity is difficult and b) it has a large component of the unorganised sector in it.”  Hence, it is safe to say that the total amount of black money as a share in the economy has risen over the last two decades.

Once these factors are taken into account, the Income Declaration Scheme no longer seems like the success it is being made out to be. Although it must be said that the government’s effort to tap into domestic black money has been much more successful than its effort to tap into black money that has left the shores of this country.

Last year the government had launched a black money window for foreign assets. Taking advantage of the compliance window, 644 declarants declared assets and income of Rs 4,164 crore in total. This meant that the government was able to collect around Rs 2,498.4 crore (60 per cent of Rs 4,164 crore) as tax revenues.

In comparison to this the Income Declaration Scheme for domestic black money has definitely been a success, but in the overall scheme of things, it is clearly not the success that it being made out to be.

Also, one danger that remains with all income declaration schemes is that they make the individuals who pay tax on time, year on year, look like idiots. Such schemes essentially tell people that as long as you are willing to pay a small penalty in the years to come, you can postpone the payment of taxes by paying a small penalty.

The Comptroller and Auditor General looked into the declarations that were made under the 1997 scheme and made some interesting observations. As it said: “The track record of declarants showed a clear scenario where they were found to have taken advantage of earlier Amnesty Schemes too…The Scheme was not in the interests of revenue and in fact it provided one more opportunity to dishonest assesses to pay tax at a preferred rate and then retire to the old habit of concealing income.”[i]

But for governments the black money amnesty schemes are an access to easy money, instead of making the more difficult decisions like shutting down loss-making companies (which to its credit the Modi government has started to push now).

To conclude, the real success of the scheme will be in the data that it will end up collecting. It needs to be made sure that the 64,275 individuals who have declared black money under the scheme, continue to pay tax in the years to come. That will be the real success of the scheme.

Hopefully, it is also the last of such schemes and in the years to come the government uses more and more information technology on expenditure data, in order to identify those who have black money and get them to cough up their share of taxes and fines. In the long-term, the only way of getting people to pay taxes is to get them to respect the system and at the same time ensure that the income tax laws are made simpler.

Postscript: If you want to read about black money issue in detail, subscribe to The Vivek Kaul Letter.

[i]A.Kumar, The Black Economy in India, Penguin Books India, 1999

The column was originally published on October 3, 2016, in Vivek Kaul’s Diary

45% of black money abroad has gone during UPA regime

Vivek Kaul


It’s a season of clean chits. The latest to join the bandwagon is Annu Tandon, the Congress Lok Sabha MP from Unnao, supposed to be close to Congress general secretary Rahul Gandhi.  “Allegations against me are absolutely baseless and malicious… I completely deny all this rubbish,” Tandon said, giving herself the clean chit.
“I had gone to the Congress meeting and have just learnt of the allegations…I feel saddened that instead of doing something to benefit the nation we are speaking about lowly matters,” she said, adding that Kejriwal was perhaps seeking publicity by making such allegations. She stopped short of saying I am ready to face any investigation, as politicians are won’t to say in such cases.
Arvind Kejriwal’s in his latest exposure has said that about Rs 6000 crore of black money was lying in the Geneva branch of HSBC as on July 2011.  This list included the brothers Mukesh and Anil Ambani, Reliance Industries, Motech Software (a Reliance Group company whose managing director Annu Tandon was), Naresh Goyal  of Jet Airways and Sandeep and Annu Tandon. Annu Tandon and her late husband Sandeep have been accused of having Rs 125 crore each stashed away in their HSBC Swiss Bank account.
There is no way of independently verifying who has how much stashed away in the Geneva branch of HSBC, unless the bank chooses to reveal it. But at a broader level it can safely be said that a lot of Indian money does end up in Swiss banks and other tax havens abroad.
And the quantum of this money going out of India is huge. A report titled Illicit Financial Flows from Developing Countries Over the Decade Ending 2009 released by Global Financial Integrity in December 2011, gives us some astounding numbers. This report was written by economists Dev Kar and Sarah Freitas and was supported by the Ford Foundation.
In the period 2000-2009 the illicit capital flows from India stood at a whopping $104billion. Currently one dollar is worth around Rs 55. Hence in rupee terms this amounts to a huge Rs 5,70,00 crore. To give the reader a sense of comparison the fiscal deficit of the government of India for the financial year 2012-2013 ( i.e. the period between April 1, 2012 and March 31, 2013) was initially estimated to be at Rs 5,13,590 crore. Fiscal deficit is the difference between what the government earns and what it spends. So the black money that went out of India in the period 2000-2009 was more than the fiscal deficit of the government of India in the current financial year. Hence the numbers clearly aren’t small by any stretch of imagination.
And this not a recent phenomenon. In another report titled The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008brought out by Global Financial Integrity and written by economist Dev Kar, it is shown, that black money has been going out of India for decades, though it has gone up in recent years.
Kar estimates that in a period of 61 years from 1948 to 2008, India lost a total of US$213 billion dollars due to illicit flows, the present value of which is at least US$462 billion. In rupee terms this works out to a whopping Rs 25,317,60 crore.  This number is almost 5 times the fiscal deficit of the government of India for the year 2012-2013.
And chances are this number is understated. As Kar writes “In all likelihood, this estimate is significantly understated because economic models can neither capture all the channels through which illicit capital can be generated nor the myriad ways in which the capital can be transferred.”
In an interview I carried out for the Daily News and Analysis (DNA) in April 2009, Professor R Vaidyanathan of IIM Bangalore had put the number at $1.4trillion or more than Rs 70lakh crore at that point of time.  “More amounts were stashed away during the Nehruvian socialist regime…In fact, in those days, the Indian rupee commanded a better value per US dollar, so fewer rupees could get a dollar. Hence the estimation that Indian money stashed away may be of the order of $1.4 trillion,” Vaidyanathan had said.
Another estimate has been put forward by Arun Kumar, a professor at the Jawahar Lal Nehru University in New Delhi and the author of Black Money in India. An article on Firstpost quotes him as saying “At least $70-80 billion goes out every year.” That is an astonishingly huge number. In comparison Kar and Freitas put the total amount of money that went out of India between 2000-2009 at $104billion.
What is interesting is that a major portion of the black money in India ends up at Swiss Bank and other tax havens abroad. As Kar puts it “The total value of illicit assets held abroad represents about 72 percent of the size of India’s underground economy which has been estimated at 50 percent of India’s GDP (or about US$640 billion at end 2008)…This implies that only about 28 percent of illicit assets of India’s underground economy are held domestically, buttressing arguments that the desire to amass wealth without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital.”
Kar’s research also shows that a lot of black money has gone abroad since the United Progressive Alliance (UPA) government led by Sonia Gandhi came to power. Between 2004 and 2008 around $96.3billion dollars of black money has gone abroad. Kar puts the total flow from 1948 to 2008 at a little over $213billion. This means that nearly 45% ($96.3billion expressed as a percentage of $213 billion) of the total black money that has gone abroad since independence has gone during the rule of UPA. UPA came to power in May 2004.
What this clearly tells us is that crony capitalism has gone through the roof since Manmohan Singh became the Prime Minister of the country. Businessmen and politicians are the most likely candidates for sending their ill gotten wealth abroad. Also, the data is available only till 2009, and corruption has only gone up since then.
The money going abroad has also gone up since India adopted a policy of economic liberalisation in 1991. Between 1991 and 2003 around $50.3 billion of black money went abroad, as per Kar’s estimates. Hence between 1991 and 2008, a total of $ 146.6 billion ($50.3billion + $96.3 billion) of black money has gone abroad.
All this money going abroad has had a huge impact on the economic development of India. As Arun Kumar wrote in an article in The Hindu in August 2011 “India could have been growing faster, by about 5 per cent, since the 1970s if it did not have the black economy. Consequently, India could have been a $8-trillion economy, the second largest in the world. Per capita income could have been seven times larger; India would then have been a middle-income country and not one of the poorest. That has been a huge cost.”
Annu Tandon in her reaction to the accusation of stashing away black money to the tune of Rs 125 crore abroad said “I feel saddened that instead of doing something to benefit the nation we are speaking about lowly matters.”
Yes these are lowly matters but given that they have cost the nation so much, they need to be talked about. And since the government and the Congress Party refuse to talk about these things it’s up to the likes of Arvind Kejriwal and Prashant Bhushan to bring it to the notice of the nation.  And if that means, as Tandon put it that Kejriwal is seeking publicity, then so be it.
Oh and in the end, let’s be ready for another round of clean chits.
The article originally appeared on www.firstpost.com on November 10, 2012. http://www.firstpost.com/economy/45-of-black-money-abroad-has-gone-during-upa-regime-521434.html
(Vivek Kaul is a writer. He can be reached at [email protected])