How not to tackle the Black
Economy in India
Arun
Kumar
CESP,SSS,JNU
The Hindu, February 27, 2011
Another
JPC has been announced. The government has been trying to create an impression
of being proactive with regard to tackling the black economy. The President’s address
and the speech by Sonia Gandhi in January mentioned the need to curb it. The Prime Minister at various for a while
expressing helplessness, has emphasised action. The Supreme Court has been
applying pressure to tackle black savings spirited out of the country and for
unearthing wrongdoings in cases of corruption like the 2G spectrum allocation
case. Home Minister Chidambaram admitted in Davos that in road construction 50
per cent of the funds are misappropriated. He has stated that there is deficit in
governance and ethical functioning of government and the Prime Minister has
endorsed this. Finance Minister Pranab Mukherjee has announced studies into
different aspects of the black economy and a Group of Ministers has been set up
to tackle the problem. Talks are on for Double Taxation Avoidance Agreements
(DTAA) with various countries – supposedly to unearth wealth kept abroad by
Indians.
Is the
government finally serious about bringing back the black funds stashed abroad,
variously estimated to be between $ 462 billion and several trillions of
dollars? These figures seem credible when one considers the scale of the
current scams (tens of billions of dollars) and the case of Hasan Ali where the
tax demand runs into billions of dollars. The CD containing names of Indians
with bank accounts in the LTG bank which the Indian government accepted in
March 2009, a year-and-a-half after it was offered by the German government,
has added to the pressure on the government. There are 77 tax havens where
illegal funds are stashed away; Switzerland is only the biggest and best known.
The
government’s actions seem to be in direct proportion to the public pressure on
it as exposes come in thick and fast. The problem is not new, so what explains
the earlier inaction? Consider Bofors or the 2G spectrum case. Initially there
has been denial and then minimal action, allowing the culprits time to escape
(as in Hasan Ali’s case where the money has disappeared). Rs.35 lakh crore in
black income is generated annually and about 10 per cent of it goes abroad. The
capital lost through this route is greater than annual net foreign investment,
yet action is minimal for so long.
The
government pleads that tax havens do not reveal names unless criminality is
established and that the Swiss government does not treat tax evasion as a
crime. The moot point is why did the Swiss government announce the immediate
freezing of Husni Mubarak’s assets without the Egyptian government giving any
evidence of criminality? Further, why did UBS agree first to give the names of
250 U.S. citizens and then another 4,500 names to the U.S. tax authorities in
2007-08 without any criminality being individually established? In the Hasan Ali case, the Swiss government
has said that it has not been given the information required. Similarly, in
Ottavio Quattrocchi’s case, the Indian government has twice lost in foreign
courts because the case has not been properly established. In 1992, Madhavsinh
Solanki, then Minister of External Affairs, passed on a chit to a Swiss
Minister apparently to slow down the Bofors case but the Narasimha Rao
government quietly buried the embarrassment by accepting his resignation. The
few cases of corruption initiated against the high and mighty are apparently
spoilt or not pursued.
Given
this history, will there be seriousness this time or will the government wait
out the storm? In the last 60 years, dozens of committees have studied various
aspects of the black economy and given thousands of suggestions. Hundreds of
these suggestions have been implemented but the size of the black economy has
grown exponentially. The Wanchoo Committee report bulges with suggestions.
Since 1971, when the highest tax rate was 97.5 per cent, tax rates have fallen
but the black economy has grown from 7 per cent to 50 per cent of GDP. Controls
and regulations have been drastically eliminated after 1991 but the size of
black economy continues to rise. The causes of black income generation lie
elsewhere. The recent rise in corporate tax collection is a reflection of
rising disparity and not better compliance.
Plugging
loopholes has only made the laws more complex, as in the case of taxation. The
ingenuity of the corrupt thwarts the enforcement agencies by either devising
newer ways of circumventing the law or simply bribing the officials. In India,
laws on paper and in practice differ because of the `Triad’ of the corrupt business class, the political class, and the
executive (see the
article “Honesty is indivisible,” The Hindu, January 29, 2011) who bend rules
to their advantage. The philosophy is: if I am in power, I can bend rules for
the favoured.
In brief,
technically we know what needs to be done to check the black economy – but the
problem is political. The top echelons of the leadership are the prime drivers
of the black economy. They do not wish to forgo the massive illegal profits
they generate. So how can the political will be generated?
A
voluntary disclosure scheme to bring back black savings stashed abroad for
`development’ is being considered. Wasn’t the Mauritius route created to allow
round tripping of funds? It has accelerated black income generation by
facilitating it. A National Security Adviser alerted the nation to terror funds
entering the stock markets to destabilise the financial markets. The Wanchoo
Committee argued that this kind of scheme makes honest people dishonest. A
report of the Comptroller and Auditor General of India on the 1997 voluntary
disclosure scheme pointed out that the same people who declared their black
incomes earlier took advantage of the 1997 scheme – becoming habitual tax
offenders.
Some
argue that elections underlie black income generation and corruption.
Presently, when a Lok Sabha constituency sees the expenditure of crores of
rupees per serious candidate, state funding will make little difference. At
best, it can be to the tune of the allowed election expenditure of Rs.25 lakh –
just a few per cent of the actual expenditure by most candidates. Further, what
is spent on the national elections officially and unofficially is not even 1
per cent of GDP for that year; so that this cannot be the cause of black
incomes. It is the black economy that works to subvert the elections. Our
present day legislators are largely the representatives of the monied and the
powerful and not of the people; so they need to keep the public confused to win
elections. They resort to vote bank politics and bribing voters and that is
what makes elections costly. Genuine democracy would not be expensive. Today,
we have formal democracy with weak content.
In this
background, it is clear that the government’s actions against corruption will
be in proportion to the public outrage and that too the minimum necessary. It
is likely that there will be pretence while the real culprits go scot-free.
Setting up a committee is to buy time and to stall questions on the subject
since the government can claim it is waiting for the report. Later, it can buy
time by pretending to look into the recommendations or bury an inconvenient
report (like the Vora Committee report).
The
Supreme Court is going after the names of those spiriting away money abroad but
not after the generation of the funds. The black incomes generated in the
country are ten times the size of what is siphoned out. In the liberalised environment,
those with black money stashed abroad can turn into non-residents overnight and
escape prosecution in India. This is perhaps the reason the Indian government
is unable to proceed against the eight entities named in the Liechtenstein
disc. For the rest, little money may be left in their accounts, given the
inordinate delays. Taxation treaties being entered into by the government with
other governments are all about legal incomes traceable to known individuals.
But black incomes are typically parked via shell companies and in benami
accounts.
What is
needed is serious investigation and prosecution in the country that will also
expose the money siphoned abroad. The government functionaries generating black
incomes personally indulge in various illegalities such as using havala. So, in
principle, there is private knowledge but not public information to stop these
activities. The help of foreign governments is hardly needed in this matter.
Intelligence agencies provide the leadership with information through tapping
and so on, which can be mined instead of being used for political blackmail.
The prosecution agencies deliberately spoil cases for political reasons. If
prosecution is not possible in India, how can the case be made in foreign lands
for booking the culprits?
In brief,
the policy pronouncements are delaying and diversionary tactics to allow those
generating black incomes to escape via shell companies and benami accounts.
There were limited gains from earlier JPCs but will this time be different? It
will be only if there is political will and action – and not more studies or
treaties with foreign governments.
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