Tag: Black Money White Paper

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 16^th 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)

Vivek Kaul

Growing up in erstwhile Bihar in the late 80s and early 90s, one of the first economic terms that I came across was “black money”. Those were pre Android phones, pre Google, pre internet, pre mobile phones and in large cases even pre landline phone days.
So, what did one do when one had a doubt like this and wanted to know what black money really was? One asked. Parents. Friends. Friends of friends(Okay, these were real friends of friends, not the Facebook variety that we have these days). Neighbourhood uncles and aunts. Bhaiyyas and Didis preparing for the UPSC or the state public service exam. And hopefully an economist.
Ranchi was a small town during those days. My social studies text book even called it a “hill station”. And the chances of finding an economist there, were next to none (not that the chances have gone up now).
So, what you got were vague explanations like, black money was black money. People looked at you and probably wondered, why is the fellow even asking this.
And so the doubt remained. As time went by, as happens in such small towns, everyone who could leave the place, got up and left, including me. Of course, over the years, I figured out what black money was. Black money was black money, one of the few economic terms which are a definition in themselves.
In April 2009, the newspaper I worked for back then, asked me to interview Proffesor R Vaidyanathan of the Indian Institute of Management at Bangalore. The professor put a number to the entire black money debate, which thanks to the Bhartiya Janata Party (BJP) was just about erupting then.
He said that around $1.4 trillion of Indian black money was stashed away abroad. This money, he elaborated could be in Switzerland and various British/US islands which are tax havens.
His estimate was based on a report titled Illicit Financial Flows from Developing Countries: 2002—2006, brought out by Global Financial Integrity(GFI), a Washington based non profit organization.
The 2013 report of GFI said that nearly $343 billion of black money left India during 2002-2011. This amounted to around 3% of India’s economic output during the period. The number was particularly high in 2011, when around $84 billion may have left the country, the report suggested.
The GFI’s estimate does not take into account criminal activities as well as corporate tax evasion. These are massive sources of black money. Nevertheless, this is the most comprehensive study of black money which leaves emerging markets like India and hence, does give us a good idea of the amount of black money leaving the country.
In the recent past, prime minister Narendra Modi has taken up the issue of bringing back black money that has left India. In his latest radio broadcast over the weekend he told the country that “As far as black money is concerned, you should have faith on this ‘pradhan sevak’. For me, it is an article of faith. Every penny of the money of poor people in this country, which has gone out, should return. This is my commitment.”
While this is a good stand to take in public, getting back all the ‘black money’ that has gone out, back to India, is not a feasible proposition. The simple reason is that all this money is not lying around at one place.
There is a great belief that all this black money is lying around in Switzerland. This isn’t true. Data released by the Swiss National Bank, the central bank of Switzerland, suggests that Indian money in Swiss banks was at around Rs 14,000 crore (2.03 billion Swiss francs). India was at the 58th position when it came to foreign money in Swiss banks. The total amount had stood at Rs 41,400 crore in 2006.
The reason for this is simple. Over the last few years as black money and Switzerland have come into focus, it would be stupid for individuals or companies sending black money out of India, to keep sending it to Switzerland.
There are around 70 tax havens all over the world. And so this money could be anywhere. Getting all this money back would involve a lot of international diplomacy and cooperation. Also, the question is why would tax havens return this money. Their economies run because of this black money and no one undoes a business model that is working.
An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland and beyond the reach of any tax authorities. Some of this money must have definitely originated in India.
Further, in the aftermath of the global financial crisis, interest rates in Western economies have crashed. Switzerland is no exception on this front and hence, Swiss banks have been paying very low interest rates over the last few years. Given this it doesn’t make any sense for Indian black money to go to Switzerland, when there are better returns to be made elsewhere.
Indian black money found its way into places like Switzerland when India had limited investment opportunities. But that is not the case now. Hence, chances are that over the last few years, Indian black money has largely stayed in India where it has been invested in areas like real estate or in metals like gold. Further, chances are that a lot of black money is being round-tripped into India through hawala to be invested in physical assets like land, apartments etc.
Hence, it is important that instead of chasing black money stashed all over the world, the government starts looking at transactions which generate black money in India. The two sectors which generate a lot of black money are real estate and education. No real estate deal is complete without paying a certain amount of the deal amount in “cash”. And even school admissions these days lead to money changing hands in the form of a “donation”.
Why can’t the government start local when it comes to unearthing black money? The answer is fairly straightforward. Many real estate companies and education institutes are run by politicians. Try taking a taxi around Mumbai and you will realize that most so called “education institutes” are run by politicians. The way this works is that the education institute is run by a non profit organization but all the assets(like the building in which the education institute is run) are owned by a private limited company and the education institute pays a rent to the private limited company for using all the assets. This is how money is tunnelled out. Why can’t the government look at these transactions?
It is ironical that we don’t even have a decent estimate for the total amount of black money in this country. As a 2012 white paper released by the ministry of finance stated “There are no reliable estimates of black money generation or accumulation, neither is there an accurate well-accepted methodology for making such estimation.”
If the government is serious about tackling the black money menace it first needs a reasonable estimate of the total amount of black money in this country. It needs a comprehensive mechanism to figure out how black money is being generated and how and where it being hidden.
Further, the central idea in unearthing black money should be to bring more and more people under the tax bracket. The situation is abysmal on this front. As the former finance minister P Chidambaram said in his February 2013 budget speech “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.” This is a totally ridiculous number. There are probably more people making that sort of money just in South Delhi.
If the government is serious about the black money issue, it should be going after these people who are hiding their income and not paying taxes. But the question is can it do that? The income tax department is one of the most corrupt institutions in the country and given half an opportunity they are ready to sell themselves out lock, stock and barrel.
Further, it is worth remembering that a lot of black money that is generated is ultimately used by politicians to fight elections. Hence, it is in their interest that the status quo continues. To conclude, black money stashed away in foreign destinations is not the real issue. The real issue is the black money that continues to be generated and hidden in India and the inability of the government to tackle it.

The article originally appeared on www.equitymaster.com on Nov 6, 2014

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

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