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.

The Bolbachan of Cleaning Up Black Money in India

One of the issues that I have often written about in the Diary is black money.  And I honestly feel that the total amount of black money going around in India will come down only once the electoral funding of political parties is cleaned up. This is an issue I have been talking about for a while now, and I first started writing about it even before notebandi happened, and the issue wasn’t fashionable enough.

Unless electoral funding of political parties is cleaned up, the other steps taken are what we in Mumbai lingo call bolbachan. Simply translated this means just plain talk and nothing else.

In the budget (or the annual Finance Bill of the government) presented on February 1, 2017, a few amendments which were supposed to clean up electoral funding of political parties, had been proposed.

Over and above these steps, a few other amendments were introduced as a part of the Finance Bill for 2017. The Bill was finally passed a few days back on March 30, 2017. These amendments along with the steps proposed earlier at that point of time when the budget was presented, essentially make sure that the Indian electoral finance system will continue to remain as opaque as it was. Or to put it simply, we went one step forward and two steps back at the same time.

Let’s examine the issues one by one.

a) One of the steps proposed in the budget was that the “maximum amount of cash donation that a political party can receive will be Rs 2,000/- from one person.” Earlier, this limit was Rs 20,000. Further, the political party did not have to declare the names of people contributing up to Rs 20,000.

The total amount of cash donation that a political party can receive has been lowered to Rs 2,000. This means political parties can still receive donations in cash. This basically means that the black money can still be channelised into electoral donations. Of course, all this has done is increase paper work. Instead of one receipt of lower than Rs 20,000 that used to be made earlier, multiple receipts of less than Rs 2,000 will now have to be made, to get around to the current rule.

As C Rammanohar Reddy writes in Demonetisation and Black Money: “The practice so far has been to split up large collections of black money into individual donations, each less than Rs 20,000 so that the anonymity of the source is maintained. The new rule only makes this more difficult; it does not prevent it… The Rs 2,000 rule will continue to keep the door open for black money.”

Some of you might feel that I am being sceptical here, but what else can one be regarding Indian political parties. Interestingly, while the cash donation limit has been reduced to Rs 2,000, political parties still don’t have to disclose the names of people donating of up to Rs 20,000.

As Milan Vaishnav the author of  When Crime Pays: Money and Muscle in Indian Politics pointed out in a recent column: While the government has lowered the cash limit to Rs. 2,000, it has not touched the disclosure threshold, which remains at Rs 20,000. Politicians are already privately joking that the new cash cap will easily be gamed; the only difference is that their chartered accounts will demand a raise.”

This is the point I had made about bolbachan—just talk without any concrete steps that are likely to make a material difference. On the face of it, this seems like a move which basically makes sure that any donation of greater than Rs 2,000 made to a political party will have to made through the banking system. But as mentioned earlier, the donation can easily be split into multiple transactions and black money can continue to finance political parties.

b) In his budget speech, the finance minister Arun Jaitley had introduced the concept of electoral bonds. As he had said: “An amendment is being proposed to the Reserve Bank of India Act to enable the issuance of electoral bonds in accordance with a scheme that the Government of India would frame in this regard. Under this scheme, a donor could purchase bonds from authorised banks against cheque and digital payments only. They shall be redeemable only in the designated account of a registered political party.”

The proposed electoral bond is a bearer bond. As Reddy points out: “It would seem that the idea is for the RBI to issue electoral bonds, which individuals/organisations can purchase at banks (by cheque, thus keeping out unaccounted cash). The buyers can donate these bonds to political parties, which can deposit them only into their bank accounts. Because they are bearer bonds the banks will know the identity of the buyer, but the political parties receiving them would not know who the donor is. This opacity about the donor may free the political party from returning favours. However, the interests of transparency are not met by such features. In any case, which donor would not want his identity to be known to the recipient political party?

Interestingly, the Wall Street Journal points out that the bearer bonds were phased out in the  United States, in the 1980s “because they are anonymous and easily used by money launderers and tax evaders.”

And this precisely what the electoral bonds will encourage in India as well, as we shall see.

Getting back to the point, the electoral bonds seem to move things above board. Hence, instead of donating cash to a political party, a donor can now use the banking system.

The trouble is this that the electoral bonds need to be seen together with other amendments which were introduced towards the end and were not originally a part of the Finance Bill.

c) So, corporates can now donate money to political parties using electoral bonds and maintain secrecy. But that is just one part of it. Earlier, a company could donate up to 7.5 per cent of the average net profit for the last three years to political parties. Further, the company had to disclose the total amount of donations made to political parties in its profit and loss account. It also needed to disclose the names of the political parties it had donated money to.

The recently passed Finance Bill of 2017 does away with these needs. What does this basically mean? It essentially means that a company can donate any amount of money to a political party without the company or the political party having to disclose it. And this, in a country like India, where the governance mechanisms are shaky, makes for a deadly combination.

This is precisely the fear that led to the phasing out of bearer bonds in the United States. As Reddy writes: “The donor’s books will only record that bonds have been bought, they will not record who the bonds have been donated to. The political party receiving the bonds will record receipt of the bonds but the identity of the benefactor will not be known. This is the perfect cover of the anonymity for pay-offs to take place. It would seem that the business-politics links are going to be strengthened and not weakened with such ‘reform’.”

As a senior CAG official told The Telegraph: “This means, for example, that an infrastructure firm could theoretically pay up to 50 per cent of its net profits to a single party as donation without anyone getting wiser as to which party has been paid… this throws open the possibility that an order to build a highway or a railway bridge could be given to a firm and that firm could pay the donation to the party in power which placed the order with it… The beauty is that if this happens, it will be legitimate and no questions can be asked by any ethics committee of Parliament or by any CAG audit.”

To cut a long story short, these changes will take the corporate-politico nexus to altogether another level. We have seen in the past how the nexus has messed both the real estate and the banking sector in India. It remains to be seen how the consequences of this year’s changes in the Finance Bill pan out.

Of course, while the political parties can continue to be opaque and non-transparent, come July 1, 2017, all income tax payees will compulsorily need to quote their Aadhaar number while filing their income tax returns.

Welcome to the new India. As I said earlier, it’s all about bolbachan.

The column originally appeared on Equitymaster on April 4, 2017