Of Jaitley, black money and much ado about nothing

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
In May earlier this year, the Parliament passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Act. After the passage of this Act, also known referred to as the black money Act, the government offered a compliance window.

This window allowed those with undisclosed foreign assets and income to declare them, pay a tax of 30% and a penalty of 30%. The window was closed on September 30, 2015.

Taking advantage of the compliance window 638 declarants declared assets and income of Rs 4,147 crore in total. This meant that the government will be able to collect around Rs 2,488 crore (60% of Rs 4,147 crore) as tax revenues. This means around Rs 3.9 crore of tax and penalty will be collected on an average from every declarant.

For all the hype and hoopla that has happened around black money in the last one year, this is barely peanuts. The tax and the penalty need to be paid to the government by December 31, 2015.

The annual report of the ministry of finance for 2014-15 has some interesting data points that need to be mentioned here. The total number of assesses in 2013-2014 had stood at 4.7 crore. These includes individuals, families, trusts and corporates. What this clearly tells us is that not many Indians pay income tax.

Hence, as a result every year a significant amount of black money on which tax is not paid is generated.

And given this, a collection of Rs 2,488 crore is basically a bad joke especially once you take into account the tremendous amount of political capital that the Narendra Modi government has spent on the black money issue.

Having said that, this should hardly come as a surprise to the government given that the black money recovery skills of the Income Tax department are nothing to write home about. As the ministry of finance annual report points out: “The Income Tax Offices throughout the country continued their drive against tax evaders. During the financial year 2014-15 (upto 30.11.2014), 2068 (provisional) search warrants were executed leading to the seizure of assets worth Rs 538.23 Crore (provisional). During the financial year (upto 30.11.2014), 1174 surveys (provisional) were conducted which yielded a disclosure of undisclosed income of Rs 4673.11Crore (provisional).”

So, once Rs 2,488 crore is looked at from the point of the numbers mentioned in the above paragraph, it doesn’t look so dreadful. The basic point here is that the black money recovery skill of the Income Tax department has been very poor.

There could be several reasons for this. Corruption. Incompetence. Not enough people. Or simply the fact that the crooks are always one step ahead of those who are supposed to catch them.

Long story short—people who have a large amount of black money know fully well the competence level of the income tax department and their ability to recover black money from those who have it.

Once we take this factor into account, the finance minister Arun Jaitley’s comment that those who declared their black money to the government could “sleep well,” can be categorised as an empty rhetoric and nothing more.

In fact, after the flop-show, Jaitley seems to have discovered that the bulk of the black money is within India. “The bulk of black money is still within India,” he wrote on his Facebook page. I have been saying this on various media platforms over the last few months.

A lot of this domestic black money has made its way into real estate over the years. As a report on black money brought out by the business lobby FICCI in February 2015 points out: “The Real Estate sector in India constitutes for about 11 % of the GDP of Indian Economy, as these transactions involve high transaction value. In the year 2012-13, Real Estate sector has been considered as the highest parking space for black money.”

What has this government (or any other for that matter) done to target the black money that has made its way into the real estate sector? Absolutely nothing. In fact, the surprising thing is that sector continues to operate more or less without any regulator despite constituting 11% of the Indian GDP.

A simple explanation for this is the fact that bulk of the ill-gotten wealth of politicians is in the real estate sector. And given that no government wants to disturb the status-quo.

A recent report in The Economic Times points out that: “Doctors, engineers and former senior managers who used to work overseas — these professionals formed the biggest chunk of those who made use of the 90-day grace period for the declaration of unaccounted wealth.” Politicians did not come out of the closet to declare their black money. And politicians, as I pointed out earlier, have their black-money in real estate.

Black money has also made its way into the stock market through the anonymous p-note route. P-notes are derivative instruments issued by foreign institutional investors (FIIs) to  investors to invest in the stock market as well as the debt market without registering with the regulator i.e. the Securities and Exchange Board of India.

What this means is that FIIs issue p-notes to investors whose identities are not known to the Indian regulator. Now compare this to the KYC that any Indian has to carry out in order to invest in a mutual fund, open a bank account or get a credit card. The world is definitely not a fair place.

The investments coming into India through the p-note route were at Rs 2.72 lakh crore as on February 2015. A major portion of this money came in through Cayman Islands, Mauritius and Bermuda. As a recent report in Business Today magazine points out: “Cayman Island with a population of less than 55,000 routed investment worth Rs 85,000 crore.”

Hence, p-notes are possibly being used to re-route black money generated in India into the Indian stock as well as debt market.

The last time government tried banning p-notes in 2007, the decision did not go down well with the FIIs. The government had to withdraw the ban. Having said that, as the Business Today report points out: “since 2007, the market regulator tightened the noose, and their share in FII investments came down from 50 per cent in 2007 to 11 per cent in February 2015.”

Nevertheless, even 11% is a big number. The question is will the government ban p-notes? The answer is no. The stock markets are anyway edgy these days and the government needs to raise Rs 69,500 crore during the course of this year. And for that it needs a strong stock market.

Over and above this, there are operators running “black ka white” schemes as well, points out columnist Debashis Basu in a recent column in the Business Standard. Basu writes that not much has been done on this front either.

To conclude, people in decision making positions know what the problem is. They also know what the solutions are. They choose to talk a lot about it, without doing much about it.

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

The column originally appeared on SwarajyaMag on October 7, 2015

Now a govt red carpet for those who have black money hidden abroad

rupee
Last week the Parliament passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015. This Bill up until now was referred to as the foreign black money Bill. Now it has become an Act.
The Act allows the government to tax those who have undisclosed foreign income and assets at the rate of 30%. No exemptions or deductions as per the Income-Tax Act 1961 will be allowed. Over and above a tax of 30%, there will also be a penalty of three times the amount of tax.
However, the government plans to offer a compliance window. This window will allow those with undisclosed foreign assets and income to declare them, pay a tax of 30% and a penalty of 30% and not face any prosecution.
In fact,
The Economic Times reported on May 18, 2015 that: “The income-tax department is likely to set up two centres, in Delhi and Mumbai, to process claims from those with dodgy overseas wealth to declare.”
The cells in Mumbai and Delhi will be manned by senior tax officials whose job will be to ensure that those who come out and declare their undisclosed foreign income and assets are not harassed. It is being suggested that individuals will be allowed a period of two months to declare their undisclosed foreign income and assets and up to a period of six months to pay the tax on it.
In simple English, what this means is that the government is essentially laying out a red carpet for those who haven’t paid income tax on the money that they have earned over the years, created black money and managed to divert that money out of the country.
The ministry of finance 2012 white paper on black money defines black money as: “any income on which the taxes imposed by government or public authorities have not been paid.”
The wealth that has been accumulated in this way “may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and corruption,” the white paper goes on to suggest.
Of course this wealth that has been accumulated through tax evasion has “neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.”
And it is these people who will now be welcomed with open arms by the government. The justification offered will be that “but, we are fining them 30% over and above the 30% tax”. Yes, but how does this decision make look the minuscule portion of Indians who have been paying their income-tax honestly over the years.
The
annual report of the ministry of finance points out that in a country with a population of more than 120 crore, the number of income tax assessees in the 2013-2014 stood at a mere 4.7 crore. And by laying out the red carpet for the tax cheats, what message is the government sending out to the 4.7 crore individuals who have been paying their taxes? This is not the best way to go about trying to increase the number of people who pay income tax. In fact, the annual report of the ministry of finance points out that between April and December 2014, just 24.35 lakh fresh assessees were added. The point being that the rate of growth of tax compliance is anyway very slow and on top of that if the government keeps welcoming those who have black money, what future does tax compliance really have in this country?
Instead of welcoming the tax cheats, the government should be naming and shaming them. Steve Levitt and Stephen Dubner make this suggestion in an American context in their new book
When to Rob a Bank…And 131 More Warped Suggestions And Well Intended Rants: “Maybe it’s time…to launch a War on Tax Cheats. What if they could demonize the tax cheats so thoroughly, emphasizing that the “tax gap” (the difference between taxes owed and money collected) is about the size of the federal deficit…Maybe they could put pictures of tax cheats on milk cartons, on flyers at the post office, even on America’s Most Wanted.” Why can’t something along similar lines be tried in India, instead of bailing out the tax cheats?
Further, between April and November 2014, the income-tax department seized assets worth Rs 538.23 crore only. This is hardly anything given the huge amount of black money floating around in the country. And given this, the government should be concentrating its resources in unearthing black money in the country, instead of welcoming those who have accumulated black money over the years.

The column originally appeared on The Daily Reckoning on May 20, 2015

When US can’t get its black money back, does India have a chance?

rupee
Over the week, the Parliament passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015, which up until now has been better know as the foreign black money Bill. Now it has become an Act. The ministry of finance 2012 white paper on black money defines black money as: “any income on which the taxes imposed by government or public authorities have not been paid.”
In my past columns on
DailyO I have maintained that while chasing black money that has left the shores of the country might seem possible it is not feasible. The reason for this is fairly simple. The money could be absolutely anywhere in the world.
In India, we like to believe that the money is stashed away in Swiss Banks. But that isn’t the case.
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 in 2013. In 2006, the total amount had stood at Rs 41,000 crore.
There are around 70 tax havens all over the world and the black money that has left the shores of this country could be stashed almost anywhere. An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland, beyond the reach of any tax authorities.
A 2013 estimate in The Economist pointed out: “Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion.” Some of this money definitely originated in India.
And given that the black money that has left India could be absolutely anywhere, chasing it isn’t the best way of going about things. There would be more bang for the buck by concentrating on black money that is still in the country.
This, in short is the argument I have made against trying to get the black money that has left the Indian shores, back to India. A standard response to this on the social media is that if the United States can do it why can’t we. So here is the answer.
The foreign black money Act passed by the Parliament this week is inspired by the Foreign Account Tax Compliance Act (FATCA) of the United States. This Act was passed in 2010. The Act was brought in after it was revealed that Swiss banks were helping American citizens hide their earnings.
As per the Act, American taxpayers are required to file a new form (Form 8938) declaring their foreign financial assets with a value greater than $50,000. This form needs to be filled up along with the annual tax return. If the taxpayer does not file the Form 8938 , he can face a fine of $10,000, which can go up to $50,000 for subsequent offences. Any tax payer who pays lower tax because he does not disclose foreign financial assets could be subject to a penalty of 40%.
The provisions of the foreign black money Act passed by the Parliament are along similar lines. One of the provisions of the Act allows undisclosed foreign income as well as assets to be taxed at the rate of 30%, without allowing for any exemptions or deductions which are allowed under the Income-Tax Act, 1961. This will be accompanied by a penalty equal to three times the amount of tax.
Getting back to FATCA—as per the Act, every financial institution outside the United States needs to figure out whether it has American citizens as clients. Having done that it needs to report the information to the Internal Revenue Service of the United States
.
Due to this, the conventional view now seems to be coming around to the idea that tax havens are now cooperating with the United States and handing over information regarding their clients to the United States.
Hence, the question is, if the United States can do it, why can’t India? And the answer lies in the fact that the United States is a global superpower. In 2013, the military expenditure of the United States amounted to $640 billion. This was nearly 36.5 percent of the global military expenditure of $1.75 trillion. In comparison, the total budget for the Indian defence services in 2015-2016 is around $2.5 billion.
With so much money being spent by the United States, the military apparatus of the United States can drop bombs anywhere in the world at a few hours’ notice. As David Graeber writes in
Debt: The First 5000 Years: “The U.S. Military … maintains a doctrine of global power projection: that it should have the ability, through roughly 800 overseas military bases, to intervene with deadly force absolutely anywhere on the planet.” It is this military might of the United States that has led to the tax havens cooperating with it.
Nevertheless, as the Americans like saying: “show me the money”. Or to put it simply, how much revenue has the Internal Revenue Service of the United States managed to collect because of FATCA? Jane G. Gravelle writing in a research paper titled
Tax Havens: International Tax Avoidance and Evasion for the Congressional Research Service estimates that FATCA is expected to “have a relatively small effect, $8.7 billion over 10 years, when compared with estimated costs of international evasion of around $40 billion a year.” So on an average the United States expects to recover $870 million per year, when the international tax evasion by Americans is around $ 40 billion per year. Hence, the recover rate for FATCA is 2.2%.
What this clearly tells us is that even the United States does not expect much out of FATCA, initially. This, despite being the only global superpower. In this scenario, how much chance does India have of recovering the black money that has left its shores?
As Bob Dylan once said(or should I say sang): “
The answer my friend is blowin’ in the wind”.

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

The column appeared on DailyO on May 14, 2015

Dear Modi sarkar, what about domestic black money?

narendra_modi
The Lok Sabha passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015 or the foreign black money Bill, yesterday. The ministry of finance 2012 white paper on black money defines black money as: “any income on which the taxes imposed by government or public authorities have not been paid.” The wealth that has been accumulated in this way “may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and corruption,” the white paper goes on to suggest.
Of course this wealth that has been accumulated through tax evasion has “neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.”
Some portion of this black money over the years has managed to escape the Indian shores and has been invested abroad. An estimate made by Washington-based research and advocacy group Global Financial Integrity in a report titled Illicit Financial Flows from Developing Countries: 2003-2012, suggests that around $439.6 billion of black money left the Indian shores, between 2003 and 2012. Through the foreign black money Bill the government is attempting to get this money back.
Also, given the penal provisions of the Bill, an attempt is being made to ensure that in the days to come, citizens pay tax on their income, instead of accumulating it as black money and then transferring it abroad.
As the finance minister Arun Jaitley put it yesterday: “All those who keep money outside — time is running out for them as the world is moving to an automatic information exchange and soon, when that is available, they will be penalised for their action.”
And what are these penalties like? The Bill states that undisclosed foreign income as well as assets will be taxed at the rate of 30%, without allowing for any exemptions or deductions which are allowed under the Income-Tax Act, 1961. This will be accompanied by a penalty equal to three times the amount of tax. Hence, the tax and penalty on undisclosed overseas income as well as assets can amount to as much as 120% (30% + 90%). Further, the amount of tax to be paid on foreign assets will be computed on the basis of its current market price and not the price at which it was bought.
Nevertheless, there is a way out of this. After the Bill becomes an Act, the government will offer a short compliance window, which will allow those with undisclosed foreign assets and income to declare them, pay a tax of 30% and a penalty of 30%.
The Bill also has a provision which allows the government to charge a penalty of Rs 10 lakh for the inaccurate disclosure of foreign assets, along with a rigorous imprisonment of six months to seven years, the first time around. Second and subsequent offences are punishable with fines of Rs 25 lakh to Rs 1 crore and a rigorous imprisonment three to 10 years.
On the face of it, the Bill seems like an honest attempt to crack down on black money that has already left the country and that might leave the country in the days to come. But there are several questions that crop up here.
Why is a short compliance window being offered? It makes the taxpayers who have been honestly declaring their foreign income as well as assets till date, look a tad stupid. Just because someone is willing to pay a fine of 30% and declare his foreign assets, does that make his less guilty? Or is this another tax amnesty scheme in disguise being offered by the government?
Further, why is there a distinction being made between domestic and foreign black money? The definition of black money in the ministry of finance white paper does not make any distinction between black money in the country and black money that has left the shores. Ultimately, almost all black money originates in the country, when people earn an income and do not pay a tax on it. So why is this artificial distinction being made? Why couldn’t the government have come up with a law which covered both domestic as well as foreign black money? Its now been in office for close to one year.
The answer perhaps lies in the way political funding works in this country. An analysis carried out by the National Election Watch and Association of Democratic Reforms reveals that during the period 2004-2005 and 2011-12, the total income of the national political parties was Rs. 4,899.46 crores. The Congress party declared the highest income of Rs 2,365.02 crores. It was followed by the Bhartiya Janata Party which declared an income of Rs 1,304.22 crores.
Between 2004-05 and 2011-12, there were two Lok Sabha elections(in 2004 and 2009) and multiple state assembly elections. It doesn’t take rocket science to come to the conclusion that the amount of donations declared by the political parties were clearly not enough to fight so many elections.
Within 90 days of completion of the General Elections, political parties are required to submit their election expenditure to the Election Commission of India. The National Election Watch and Association of Democratic Reforms has analysed this expenditure for the last Lok Sabha election and it makes for a very interesting reading. This expenditure statement contains the “details of the total amount received as funds in the form of cash, cheques and demand drafts and the total amount spent under various heads.”
The total amount of funds collected by national political parties for the 2014 Lok Sabha election was at Rs 1158.59 crores. This was 35.5% higher than the funds collected for the 2009 Lok Sabha elections. The total declared expenditure of the national political parties was Rs 1308.75 crore, up by 49.4% from 2009.
Now compare this to an estimate made by the Centre for Media Studies in March 2014. It estimated 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 would spend around Rs 7,000-8,000 crore to conduct the elections. The remaining amount of around Rs 22,000-23,000 crore would be spent by the candidates fighting the elections.
Of course, national political parties are not the only parties fighting elections. Nevertheless, the difference between the officially declared expenditure and the ‘real’ expenditure to fight elections, is huge. Where does this money come from? The domestic black money essentially finances political parties and in the process elections in India. And given this, no government(and political party) can really go after it. Meanwhile, they will keep talking about foreign black money.

Moral of the story—You don’t kill the goose that lays golden eggs.

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

The column originally appeared on DailyO on May 12, 2015