The fundamentals of the chaos:
Some of my friends have in private expressed
astonishment regarding my stiff position against the <demonitisation> related
chaos prevalent in the country now. I thought I will try to put in the form of
an article what I feel about the entire chaos going on, as a student of
Economics and as a tax man.
At the outset, to understand what is
black money, how it is generated, particularly in India and the history that
has lead us to the current situation, I thought that the write up available on
the Wikipedia is fairly comprehensive. I
am therefore extracting the relevant portions for easy reading:
From wikepedia:
“Source of
black money
Some Indian corporations practice transfer mispricing,
by under-invoicing their exports and
over-invoicing their imports from tax haven countries such as Singapore, UAE, and Hong Kong.
Thus the promoters of the public limited companies who hold rarely more than
10% of share capital, earn black money abroad at the cost of majority share
holders and tax income to the Indian government.[citation needed]
Politicians, political parties and corrupt higher officials of
government and its institutions take bribes from foreign companies and park or
invest the money abroad in tax havens for transferring to India when needed.
Many times locally earned bribes, funds, and collections are also routed abroad
through hawala channels
for evading from Indian tax authorities and consequent legal implications.[citation needed]
In the Vodafone-Huthchison tax case,
a foreign multinational company also evaded tax payments in India by making
transactions with shell companies registered in tax haven countries[2]
Round-tripping
of black money
The unlawfully acquired money kept abroad is routed back to
India by the round tripping processes. Round tripping involves
getting the money out of one country, sending it to a place like Mauritius and
then, dressed up to look like foreign capital, sending it back home to earn
tax-favoured profits.[9]
Foreign
direct investment (FDI)
is one of the legal channels to invest in Indian stock and financial markets.
As per data released by the Department
of Industrial Policy and Promotion (DIPP),
two of the topmost sources of the cumulative inflows from April 2000 to March
2011 are Mauritius (41.80 per cent, US$54.227 billions) and Singapore (9.17 per
cent, US$11.895 billions). Mauritius and Singapore with their small economies
cannot be the sources of such huge investments and it is apparent that the
investments are routed through these jurisdictions for avoidance of taxes and
for concealing the identities from the revenue authorities of the ultimate
investors, many of whom could actually be Indian residents, who have invested
in their own companies.[10][11]
Investment in the Indian stock market through participatory notes (PNs) or
overseas derivative instruments (ODIs) is another way in which the black money
generated by Indians is re-invested in India. The investor in PNs does not hold
the Indian securities in her or his own name. These are legally held by the
FIIs, but derive economic benefits from fluctuations in prices of the Indian
securities, as also dividends and capital gains, through specifically designed
contracts..[citation needed]
Foreign funds received by charitable organisations,
non-government organisations (NGOs) and other associations need not disclose
the Indian beneficiary.[citation needed]
Gold imports through official channel and smuggling
is a major conduit to bring back the black money from abroad and convert in to
local black money as the gold commands high demand among the rural investors
particularly.[12] Also fictitious high value round trip transactions
via tax haven countries by diamonds and precious stones exporters and importers
is a channel for to and fro transactions outside the country.[13] Also, fictitious software exports can be
booked by software companies to bring black money in to India as tax exemptions
are permitted to software companies.[citation needed]
Unlike in earlier decades, the interest rates offered abroad in
US currency is negligible and there is no capital appreciation if the money is
parked abroad by the Indians. So, Indians are routing their foreign funds back
to India as the capital appreciation in Indian capital markets is far more attractive.[14]
2016
Panama Papers leak
The 2016 Panama Papers scandal is the largest-ever leak of
information on black money in history.[15] International Consortium of Investigative Journalists first obtained the leaked information,
revealing over 11 million documents. These documents pertain to 214,000 offshore
entities and span almost 40 years. The papers originated from Mossack Fonseca, a Panama-based law firm with
offices in more than 35 countries. The list of names exposed in the scandal
includes 500 Indians who flouted rules and regulations, such as Amitabh Bachchan, Aishwarya Rai, Niira Radia,[16] KP Singh, Garware family, Harish Salve, and others.[17][18][19]
Black
money in Swiss banks
In early 2011, several reports Indian media alleged Swiss
Bankers Association officials to have said that the largest depositors of
illegal foreign money in Switzerland are Indian.[1][20] These allegations were later denied by
Swiss Bankers Association as well as the central bank of Switzerland that
tracks total deposits held in Switzerland by Swiss and non-Swiss citizens, and
by wealth managers as fiduciaries of
non-Swiss citizens.[2][3][21]
James Nason of Swiss Bankers Association in an interview about
alleged black money from India, suggests "The (black money) figures were
rapidly picked up in the Indian media and in Indian opposition circles, and
circulated as gospel truth. However, this story was a complete fabrication. The
Swiss Bankers Association never said or published such a report. Anyone
claiming to have such figures (for India) should be forced to identify their
source and explain the methodology used to produce them."[3][22]
In August 2010, the government revised the Double Taxation
Avoidance Agreement to provide means for investigations of black money in Swiss
banks. This revision, expected to become active by January 2012, will allow the
government to make inquiries of Swiss banks in cases where they have specific
information about possible black money being stored in Switzerland.[23]
In 2011, the Indian government received the names of 782 Indians
who had accounts with HSBC.
As of December, 2011, the Finance Ministry has refused to reveal the names, for
privacy reasons, though they did confirm that no current Members of Parliament
are on the list. In response to demands from the Bharatiya Janata
Party (BJP) opposition
party for the release of the information, the government announced on 15
December that, while it would not publish the names, it would publish a white
paper about the HSBC information.[24]
According to White Paper on Black Money in India report,
published in May 2012, Swiss National Bank estimates that the total amount of
deposits in all Swiss banks, at the end of 2010, by citizens of India were CHF
1.95 billion (INR 92.95 billion, US$2.1 billion). The Swiss Ministry of
External Affairs has confirmed these figures upon request for information by
the Indian Ministry of External Affairs. This amount is about 700 fold less
than the alleged $1.4 trillion in some media reports.[2]
In February 2012, Central
Bureau of Investigation (CBI)
director A P Singh speaking at the inauguration of first Interpol global
programme on anti-corruption and asset recovery said: "It is estimated
that around 500 billion dollars of illegal money belonging to Indians is
deposited in tax havens abroad. Largest depositors in Swiss Banks are also
reported to be Indians". In a hint at scams involving ministers, Singh
said: "I am prompted to recall a famous verse from ancient Indian
scriptures, which says – यथा राजा तथा प्रजा. In other words, if the King is immoral so would be his
subjects"[4][25] The CBI Director later clarified in India's
parliament that the $500 billion of illegal money was an estimate based on a
statement made to India's Supreme Court in July 2011.[6]
After formal inquiries and tallying data provided by banking officials
outside India, the government of India claimed in May 2012 that the deposits of
Indians in Swiss banks constitute only 0.13 per cent of the total bank deposits
of citizens of all countries. Further, the share of Indians in the total bank
deposits of citizens of all countries in Swiss banks has reduced from 0.29 per
cent in 2006 to 0.13 per cent in 2010.[2]
The through the Investigation Division of the Central Board of Direct
Taxes released a White
Paper on Black Money giving the Income Tax Department increased powers.[26]
2015 HSBC
leaks
In February 2015, Indian Express released the list of 1195 Indians
account holders and their balances for the year 2006-07 in HSBC's
Geneva branch. The list was obtained by French newspaper Le Monde and
included the names of several prominent businessmen, diamond traders and
politicians.[27] The number of Indian HSBC clients is
roughly double the 628 names that French authorities gave to the Indian
Government in 2011.[28] Indian government said it will probe into
this matter.[29] The balance against the 1195 names stood at ₹25,420 crore (US$3.8 billion).[30]
The list which had names of dictators and international
criminals, was simultaneously published by news organisations in 45 countries
including The Guardian, UK; Haaretz, Israel; BBC, London.[31] HSBC had helped its clients evade taxes[32] and said in a statement that
"standards of due diligence were significantly lower than today."[33]
Domestic
black money
Indian
companies are reportedly misusing public trusts for money laundering. India has no
centralized repository— like the registrar of companies for corporates—of
information on public trusts.[34]
SIT on
black money
Noted jurist and former law minister Ram Jethmalani along with many other well known
citizens filed a Writ Petition (Civil) No. 176 of 2009 in the Supreme Court of
India (SC) seeking the
court's directions to help bring back black money stashed
in tax havens abroad
and initiate efforts to strengthen the governance framework to prevent further
creation of black money.[35]
In January 2011, the SC asked why the names of those who have
stashed money in the Liechtenstein Bank have not been disclosed.[36] The court argued that the government should
be more forthcoming in releasing all available information on what it called a
"mind-boggling" amount of money that is believed to be held illegally
in foreign banks.[37]
The SC on 4 July 2011, ordered the
appointment of a Special Investigating Team (SIT) headed by former SC judge BP Jeevan Reddy to act as a
watch dog and monitor investigations dealing with the black money. This body
would report to the SC directly and no other agency will be
involved in this. The two judge bench observed that the failure of the
government to control the phenomenon of black money is an indication of
weakness and softness of the government.[38]
The issue of unaccounted monies held by nationals, and other
legal entities, in foreign banks, is of primordial importance to the welfare of
the citizens. The quantum of such monies may be rough indicators of the
weakness of the State, in terms of both crime prevention, and also of tax
collection. Depending on the volume of such monies, and the number of incidents
through which such monies are generated and secreted away, it may very well
reveal the degree of "softness of the State."
The government subsequently challenged this order through Interlocutory
Application No. 8 of
2011. The bench (consisting of Justice Altamas Kabir in place of Justice B Sudershan Reddy,
since Justice Reddy retired) on 23 September 2011 pronounced a split verdict on
whether government plea is maintainable. Justice Kabir said
that the plea is maintainable while Justice Nijjar said it is not. Due to this
split verdict, the matter will be referred to a third judge.[39][40]
In April 2014, Indian Government disclosed to the Supreme Court the names of 26 people who had
accounts in banks in Liechtenstein, as revealed to India by German authorities.[41]
On 27 October 2014, Indian Government submitted name of three people
in an affidavit to the Supreme Court who have black money account in foreign
countries.[42] But on the very next day, Supreme Court of
India orders centre Government to reveal all the names of black money account
holders which they had received from various countries like Germany. The
honorable bench of the Supreme court also asked the Centre not to indulge in
any kind of probe rather just pass the names to them and Supreme court will
pass the order for further probe.[43]
But the facts were the other way round, as the clarification
affidavit filed by the Finance Ministry on October 27 revealed.[44] The affidavit asserted that a complete list
of cases where information had been obtained from the German and French
governments, with the status of the action taken by the government was
submitted by the Central Board of Direct Taxes on June 27. It added that the
CBDT officials also met and briefed the SIT on the status of the cases,
background of the information received, non-sharing of information by Swiss
authorities, and constraints faced by the government and alternative methods of
securing account details.[45]
On 12 May 2015, Ram Jethmalani attacked
Modi Government for failing to bring back the Black money as was promised
before Election.[46][47][48]
On 2 November 2015, HSBC whistleblower Herve Falciani said he is willing to
"cooperate" with the Indian investigative agencies in black money probe
but would need "protection". Prashant Bhushan and Yogendra Yadav furnished a letter written by Falciani
on 21 August 2015, to Justice (retd) M B Shah, who is heading the SIT on black
money.[49][50] Under
the supervision of the SIT the I-T department has recovered just around Rs
3,500 crore from some of the account holders and expected to recover a total of
10000 crore till March 2015.[51]
Double
taxation agreements
Indian Government has repeatedly argued before the Court that it
cannot divulge the names. It has further argued that the privacy of individuals
would be violated by the revelation of data. These arguments are only designed
to stall the revelation of names of some favoured entities. BJP leader Dr.Subramanian Swamy said that DTA was not a valid reason
for not revealing names of the accounts of Indians held in foreign banks.[52][53]
DTAA is about declared white incomes of entities so that tax may
be levied in one or the other country and not in both. Black income is not
revealed in either of the two countries so there is no question of double
taxation. Further, this data would not be available to either of the two
countries to be exchanged. It is no wonder then that till date, no data has
been supplied to India by any of the countries with which this treaty has been
signed. In brief, DTAA is about white incomes and not black incomes, so it is
disingenuous to say that in future no data would be given to us if names are
given to courts.[54]
Criticism
of government
Different governments have tried to stall SIT.[55] A bank has been revealed to have acted like
a hawala operator. Other MNC and private Indian
banks are also suspected to have indulged in these activities[54]
The HSBC Black money whistleblower Herve Falciani, who works with a team of
lawyers and experts, told NDTV that there is "1000 times more
information" available for investigators and there are a lot of business
procedures to be unveiled to them. "It's just up to (the Indian administration).
They can contact us," he said. He said India was given only 2 MB of the
200 GB of data. "If India asks tomorrow we will send a proposal
tomorrow," he added.[56] On 2 November 2015, Herve Falciani told in a press conference organised
by Prashant Bhushan and Yogendra Yadav that, India has not used information
on those illegally stashing away black money in foreign bank accounts, and
still millions of crores were flowing out.[49] [57][58]
Hasan Ali
case
Hasan Ali Khan was arrested by Enforcement
Directorate and the
Income Tax Department on charges of stashing over 360 billion rupee in
foreign banks.[59] ED lawyers said Khan had financed
international arms dealer Adnan Khashoggi on several occasions.[60]
However, media sources claimed this case is becoming yet another
perfect instance of how investigative agencies like Income Tax Department go
soft on high-profile offenders.[61][62][63][64] Ali's premises were raided by ED as far
back as 2007. According several news reports, the probe against him has
proceeded at an extremely slow pace and seems to have hit a dead end.[65][66][67][68][69][70]
India Today claimed that it had verified a letter confirming the
US$8 billion in black money was in a Swiss bank UBS account, and the government
of India too has verified this with UBS.[71]
The Swiss bank UBS has denied Indian media reports alleging that
it maintained a business relationship with or had any assets or accounts for
Hasan Ali Khan accused in the US$8 billion black money case. Upon formal
request by Indian and Swiss government authorities, the bank announced that the
documentation supposedly corroborating such allegations were forged, and
numerous media reports claiming US$8 billion in stashed black money were false.[72][73] India Today, in a later article, wrote,
"Hasan Ali Khan stands accused of massive tax evasion and stashing money
in secret bank accounts abroad. But the problem is that the law enforcement
agencies have precious little evidence to back their claims. For one, UBS
Zurich has already denied having any dealings with Khan."[74]
Estimates
of Indian black money
As Schneider estimates, using the dynamic multiple-indicators
multiple-causes method and by currency demand method, that the size of India's
black money economy is between 23 and 26%, compared to an Asia-wide average of
28 to 30%, to an Africa-wide average to 41 to 44%, and to a Latin America-wide
average of 41 to 44% of respective gross domestic products. According to this
study, the average size of the shadow economy (as a percent of
"official" GDP) in 96 developing countries is 38.7%, with India below
average.[75][76][77]
Public protests and government's response
Further
information: 2011
Indian anti-corruption movement and Corruption in India
In May 2012, the Government of India published a white paper on
black money. It disclosed India's effort at addressing black money and
guidelines to prevent black money in the future.[2]
India has following institutions already preventing, finding and
investigating underground economy and black money.[2]
Swami Ramdev, popular as Baba Ramdev is
a Hindu swami and a yoga guru. He is a social activist and has staged protests
against corruption in the country. He has been associated with the 2011 Indian
anti-corruption movement and also started his Bharat Swabhiman first phase
Yatra with the pledge of disease free India and simultaneously to eradicate corruption
and bring back black money from the birthplace of Sri Krishna, Dwarika Gujarat
on 2 September 2010. This yatra has been through 25 states of India like
Rajasthan, Jammu and Kashmir, Himachal Pradesh, Haryana, Uttar Pradesh,
Jharkhand, Chhattisgarh, Orrisa, Assam, West Bengal, Maharashtra, Meghalaya and
ends at the city of Mahakal Ujjain. On 20 September Swami Ramdev had started
second phase of his yatra from the fort of Jhansi. More than 1 lakh people of
Jhansi city had taken pledge to fight against corruption. On 30 January 2011, a
written representation of people from over 600 districts was sent to the Prime
Minister which contained demand of bringing back black money stashed abroad
& putting an end to corruption, which was supported by all major social,
spiritual groups and organizations of the nation. Ramdev himself
sent the signed representation to the President of India through the District
Magistrate of Bilaspur. Soon after on 27th Feb, 2011 he, organized a huge rally
in Ramlila Maidan, Delhi which was attended by lakhs of people after which a
written representation was handed over to the President to bring back black
money, on the day which marks the birth anniversary of freedom fighter Shaheed
Chandrasekhar Azad.[78][79][80]
Central Board of Direct Taxes: is a statutory
authority functioning across India under the Central Board
of Revenue Act of
1963. The Member(Investigation) of the CBDT, exercises control over the Investigation Division of the Central Board of Direct
Taxes. The Member is a high ranking IRS officer of the rank of
Special Secretary to the Government of India. The Member controls the:
·
Directorate of Income Tax Intelligence and Criminal
Investigation.
The Director General of Income Tax (International Taxation) is
in charge of taxation issues arising from cross-border transactions and transfer
pricing. This organisation has been in operation for nearly 50 years, is
primarily responsible for combating the menace of black money, has offices in
more than 800 buildings spread over 510 cities and towns across India and has
over 55,000 employees and even employees who are deputed from premier police
organisations to aid the department.
Enforcement Directorate: was established in 1956. It
administers the provisions of the Foreign
Exchange Regulation Act of
1973 (FERA), later updated to Foreign
Exchange Management Act of
1999 (FEMA). It is entrusted with the investigation and prosecution of
money-laundering offences, confiscation of the proceeds of such crime, matters
related to foreign exchange
market and
international hawala transactions. This India-wide
directorate, with focus on major financial centres in India, has 39 offices and
2000 employees.
Financial Intelligence Unit: has been operating as
a separate investigative entity since 2004. This government organisation for
receiving, processing, analyzing and disseminating information relating to
suspect financial transactions. It shares this information with other
ministries, enforcement and financial investigative agencies of state and
central government of India. Every month, it routinely examines about 700,000
investigative reports and over 1,000 suspect financial transaction trails to
help identify and stop black money and money laundering.
Central Board of Excise and Customs and Directorate of Revenue
Intelligence: is the apex intelligence organisation responsible for
detecting cases of evasion of central excise and service tax. The Directorate
develops intelligence, especially in new areas of tax evasion through its intelligence
network across the country and disseminates information across Indian
government organisations by issuing Modus Operandi Circulars and Alert
Circulars to apprise field formations of the latest trends in tax evasion. It
routinely arranges for enforcement operations to research into the evasion of
duty and taxes. The Directorate of Revenue Intelligence functions under the
CBEC. It is entrusted with the responsibility of collection of data and
information and its analysis, collation, interpretation and dissemination on
matters relating to violations of taxation and customs law. The organisation
has thousands of employees and is divided into seven zones all over India. It
maintains close liaison with the World Customs
Organisation, Brussels, the Regional Intelligence Liaison Office at
Tokyo, INTERPOL, and foreign customs administrations.
Central Economic Intelligence Bureau:
functions under India's Ministry of Finance. It is responsible for
coordination, intelligence sharing, and investigations at national as well as
regional levels amongst various law enforcement agencies to prevent financial
crimes, generation and parking of black money and illegal transfers. This
organisation maintains constant interaction with its Customs Overseas
Investigation Network (COIN) offices to share intelligence and information on
suspected international financial transactions. The COIN offices gather
evidence through diplomatic channels from the foreign custom offices and other
foreign establishments to establish cases of mis-declaration to help identify
and stop tax evasion and money laundering.
In addition to the primary agencies listed above, India has 10
additional separate departments operating under the central government of India
- such as National Investigation Agency and National Crimes Record Bureau - to
help locate, investigate and prosecute black money cases. Discovery and
enforcement is also assisted by India's Central
Bureau of Investigation and
state police.[2]
In addition to direct efforts, the Indian central government
coordinates its efforts with state governments with dedicated departments to
monitor and stop corporate frauds, bank frauds, frauds by non-banking financial
companies, sales tax frauds and income tax-related frauds.
MC Joshi committee on black money
After a series of ongoing demonstrations
and protests across India, the government appointed a high-level
committee headed by MC Joshi (the then CBDT Chairman[81]) in June 2011 to study the
generation and curbing of black money. The committee finalised its draft report
on 30 January 2012. Its key observation and recommendations were:[82]
1.
The two major national parties (an apparent
reference to Indian National
Congress, BJP) claim to have incomes of merely ₹5 billion (US$74 million) and ₹2 billion(US$30 million).
But this isn't "even a fraction" of their expenses. These parties
spend between ₹100
billion (US$1.5 billion)
and ₹150
billion (US$2.2 billion)
annually on election expenses alone.[82]
2.
Change maximum punishment under Prevention
of Corruption Act from
the present 3, 5 and 7 years to 2, 7 and 10 years rigorous imprisonment and
also changes in the years of punishment in the Income Tax Act.[82]
3.
Taxation is a highly specialised subject. Based on domain
knowledge, set up all-India judicial service and a National Tax Tribunal.[82]
4.
Just as the USA Patriot Act under
which global financial transactions above a threshold limit (by or with
Americans) get reported to law enforcement agencies, India should insist on
entities operating in India to report all global financial transactions above a
threshold limit.[82]
5.
Consider introducing an amnesty scheme
with reduced penalties and immunity from prosecution to the people who bring
back black money from abroad.[82]
Proposals to prevent Indian black money
History
Even in colonial India, numerous committees and efforts were
initiated to identify and stop underground economy and black money with the
goal of increasing the tax collection by the British Crown government. For
example, in 1936 Ayers Committee investigated black money from the Indian
colony. It suggested major amendments to protect and encourage the honest
taxpayer and effectively deal with fraudulent evasion.[85]
Current Proposals
In its white paper on black money, India has made the following
proposals to tackle its underground economy and black money.[2]
Reducing disincentives against voluntary compliance
Excessive tax rates increase black money and tax evasion. When
tax rates approach 100 per cent, tax revenues approach zero, because higher is
the incentive for tax evasion and greater the propensity to generate black
money. The report finds that punitive taxes create an economic environment
where economic agents are not left with any incentive to produce.
Another cause of black money, the report finds is the high
transaction costs associated with compliance with the law. Opaque and
complicated regulations are other major disincentive that hinders compliance
and pushes people towards underground economy and creation of black money.
Compliance burden includes excessive need for compliance time, as well as
excessive resources to comply.
Banking transaction tax
Arthakranti, Pune-based think-tank has outlined policy
prescription that involves replacement of most direct and indirect levies with
a banking transaction tax and de-monetisation of currency notes of Rs 500 and
Rs 1,000 to help prevent Indian black money, ease inflation, improve employment
generation and also lower corruption.[86][87]
Economic liberalisation
The report suggests that non-tariff barriers to economic
activity such as permits and licences, long delays in getting approvals from
government agencies are an incentive to proceed with underground economy and
hide black money. When one can not obtain a licence to undertake a legitimate
activity, the transaction costs approach infinity, and create insurmountable
incentives for unreported and unaccounted activities that will inevitably
generate black money. The successive waves of economic liberalisation in India
since the 1990s have encouraged compliance and taxes collected by the government
of India have dramatically increased over this period. The process of economic
liberalisation must be relentlessly continued to further remove underground
economy and black money, suggests the report.[2]
Reforms in vulnerable sectors of the economy
Certain vulnerable sectors of Indian economy are more prone to
underground economy and black money than others. These sectors need systematic
reforms. As example, the report offers gold trading, which was one of the major
sources of black money generation and even crime prior to the reforms induced
in that sector. While gold inflows into India have remained high after reforms,
gold smuggling is no longer the menace as it used to be. Similar effective
reforms of other vulnerable sectors like real estate, the report suggests can
yield a significant dividend in the form of reducing generation of black money
in the long term.
The real estate sector in India constitutes about 11 per cent of
its GDP. Investment in property is a common means of parking unaccounted money
and a large number of transactions in real estate are not reported or are
under-reported. This is mainly on account of very high levels of property
transaction taxes, commonly in the form of stamp duty. High transaction taxes
in property are one of the biggest impediments to the development of an
efficient property market. Real estate transactions also involve complicated
compliance and high transactions costs in terms of search, advertising,
commissions, registration, and contingent costs related to title disputes and
litigation. People of India find it easier to deal with real estate
transactions and opaque paperwork by paying bribes and through cash payments
and under-declaration of value. Unless the real estate transaction process and
tax structure is simplified, the report suggests this source of black money
will be difficult to prevent. Old and complicated laws such as the Urban
Land Ceiling Regulation Act and Rent Control Act need to be repealed, property value
limits and high tax rates eliminated, while Property Title Certification system
dramatically simplified.[2]
Other sectors of Indian economy needing reform, as identified by
the report, include equity trading market, mining permits, bullion and non-profit
organisations.
Creating effective credible deterrence
Effective and credible deterrence is necessary in combination
with reforms, transparency, simple processes, elimination of bureaucracy and
discretionary regulations. Credible deterrence needs to be cost effective,
claims the report.[2] Such deterrence to black money can be
achieved by information technology (integration of databases), integration of
systems and compliance departments of the Indian government, direct tax
administration, adding data mining capabilities, and improving prosecution
processes.
Supportive measures
Along with deterrence, the report[2] suggests public awareness initiatives must
be launched. Public support for reforms and compliance are necessary for long
term solution to black money. In addition, financial auditors of companies have
to be made more accountable for distortions and lapses. The report suggests
Whistleblower laws must be strengthened to encourage reporting and tax
recovery.
Amnesty
Amnesty programmes have been proposed to encourage voluntary
disclosure by tax evaders. These voluntary schemes have been criticized on the
grounds that they provide a premium on dishonesty and are unfair to honest
taxpayers, as well as for their failure to achieve the objective of unearthing
undisclosed money. The report[2] suggests that such amnesty programmes can
not be an effective and lasting solution, nor one that is routine.
International enforcement
India has Double Tax Avoidance Agreements with 82 nations,
including all popular tax haven countries. Of these, India has expanded
agreements with 30 countries which requires mutual effort to collect taxes on
behalf of each other, if a citizen attempts to hide black money in the other
country. The report[2] suggests that the Agreements be expanded to
other countries as well to help with enforcement.
Modified Currency Notes
Government printing of such legal currency
notes of highest denomination i.e.; ₹1,000 (US$15)
and ₹500 (US$7.40) which remain in the market
for only 2 years. After a 2-year period is expired there should be a one-year
grace period during which these currency notes should be submitted and accepted
only in bank accounts. Following this grace period the currency notes will
cease to be accepted as legal tender or destroyed under the instructions of The
Reserve Bank of India. As a consequence turning most of the unaccountable money
into accountable and taxable money.
Corruption in education
Further
information: Capitation fee
Many institutions that are meant to provide education have been
promoting corruption, and education has been a major contributor to domestic
black money in India. Single common entrance exams for various professional
courses (medicine and allied, engineering and allied, business management and
allied),[88] releasing the audited financial statements
of the trusts/not-for-profit organizations that own these educational
institutions in the public domain (website, a common e-repository), stoppage of
government funds from AICTE, DST etc. to such institutions, are some of the
suggestions to reduce the generation of black money in education.[89]
Withdrawal of currency notes of higher denomination
There has been suggestions to withdraw currency notes of higher
denominations such as the 1000 rupee notes.[90][91][92] While this can lead to an increase in
printing costs for RBI, the opinion is that that these costs should be weighed
against the misuse of high-value notes.[93]”
------
Out
of the total quantum of black money pertaining to India, the major portion lies
abroad. Out of that which is in the
Indian territory, major portion is held in real estate and in the form of gold
and ornaments, gems or artefacts.
Black
money is laundered other than through trusts, as seen in the above write up,
also by means of wrongly availing tax exemptions, fudging figures for the
purpose of taxation and also misdeclarations in the returns. One
major form of misdeclaration is showing the uncounted income as ‘Agricultural
Income’, which is exempt from Income Tax.
By
demonetisation, none of the above will get fished out. They remain as they are, white as a
dove. The amounts involved with regard
to wrong declaration, wrong exemption used, etc, wherever proceedings are
pending, will also fall only under the category of grey money and not black money.
Thus
the actual size of the black money, held without being accounted at all (even
without mis declaration, etc) and in the form of hard cash is miniscule.
Now
our entire exercise is stated to be targeted against this miniscule amount.
Now,
presuming that after all this exercise, that amount is brought to book, have the
sources for generation of such black money been plugged?
After
this purge, will further generation of this type of black money stop?
If
yes, then the question is why this exercise, if further generation of such
black money will get stopped and why the various agencies cited in the write up
above cannot deal with identifying and extinguishing the current black
money? Why a carpet bombing, instead of
a surgical strike?
If
the answer is no, then what purpose is this entire exercise going to serve?
To
say that the steps to curb subsequent generation of black money will be taken
subsequently, is a laughable one since, when the citizens of the country are
put to such a tough tread mill, the loop holes for further non-generation of
graft and black money should be in place.
The exercise cannot be repeated again and again.
The
next question is whether hoarding 2000 Rs notes is going to be more difficult
than hoarding 1000 Rs or 500 Rs?
Are
the new notes fake proof? (Of course on this only time will have to tell.) But what is commonly seen is that technology
has no patriotism. It serves in the
hands of any one caring to use it. The
urge to exploit it completely with a killer instinct is usually seen at the
hands of the terror groups.
Then
what is the cost of this entire exercise –on the RBI for printing the new
currency, on the banks and other institutions in distribution of the same, on
the market in for the form of strain on the entire supply-demand-production-chain
and upon the common man, whose private savings have been snatched away and he
is at the mercy of the government to get it back.
What actually is the definition of ‘Demonitisation”?
As
per Investopedia “Demonetization is the act of stripping a currency unit of its status as legal
tender. Demonetization is necessary whenever there is a change
of national currency. The old unit of currency must be retired and replaced
with a new currency unit.”
Now,
this could be done in a phased manner, as suggested in the wikepedia write up with a time frame, giving each currency an expiry date,
or could be done at a stroke, as has been attempted in India now. But in India, it has not been completely
taken away because, there have been exceptions granted for use of old notes. Thus, the current exercise is caught between
the two stools.
There
is absolutely no guarantee that the exemptions will themselves not be misused
for laundering the black money held in hard currency.
The role of the
banks, particularly the new generation private banks in enabling their prime customers to launder the notes cannot be
ruled out. The role of some of such banks have been mentoned in the write up
above.
The
passing on even the fake currencies into the bank during the mele, and getting
new ones in their place also cannot be ruled out.
Further,
by withdrawing the currency amount for 86% held by the public at one go, the
pressure to replace it has been enormous and no light appears at the end of the
tunnel till now.
As
could be seen from the definition, demonitisation means that the old currencies
are replaced with new ones. In the present context of India, they have not been
replaced fully. Instead, people have been
forced to deposit them in accounts in the banks.
Since the new notes are not yet supplied to the extent of
demonitisation, there are curbs on the withdrawals from the banks.
If the
banks, for any reasons of their own, had put such curbs, it would have attracted
legal action. Now, the Government is giving
cover for such a ‘Customer unfriendly act’, in the name of ‘national
requirement’.
I
am not going into the fallacy of the expectation to re-engineer the entire
country (largely living in rural areas, without banks and ATMs) to a plastic-card-economy and reduce cash transactions, as the
Government is understood to have told the Supreme Court in an affidavit today
(24.11.2016) as one of the objectives of this move.
But
one thing that is clear from the Prime Minister’s statement a couple of days
ago, that within 10 days, more than 5 lakh crores of money has come into the
banks and that it can be used for development, lets the cat out of the bag.
It
was Shri. S.Gurumurthy, the Sangh Parivar’s own economist who had stated that one
of the prime reasons for our country withstanding the global melt down was the
fact that in India, we have the concept of family savings.
Now,
in the name of demonitisitation, by forcing people to deposit all their private
savings, held in cash, into the banks, the Government has laid it’s hand on this
huge capital. They proclaim that this can be used for development activities,
as if the entire amount was black money and they have caught the loot.
The
sops given by them for this is that the interest rates will be lowered.
Now,
who are going to be benefitted by the lowered interest rates?
Not the ordinary man,
who does not easily get any loans because he does not have any collaterals to
provide. It is the already rich who can
provide any security and do business at the risk of the other man’s money (in
this case the poor man’s money).
For the middle class, pensioners and old people, who do not want to take the risks of investing in share market, already the interest rates are so low that they still hold the amounts in the banks only out of fear of keeping them at their homes and in the fond hope that the amounts will be available in times of emergency.
And even they spend sleepless nights on learning that the debit card security is compromised. So much regarding the security of the cash lying in banks in our names.
Now, whether the
ordinary man is entitled to hold cash as his savings?
The daily/weekly wage earners, whose working
hours start before the banking hours and end only after the banks close for the
day, who work on all 6 days of the week, if not 7, who are not literate and who are not well versed with the use of ATMs etc,
who do not go to departmental stores to purchase their daily requirements and
swipe the cards, definitely feel secured, to hold their savings in cash – for their
day to day expenses, emergencies and functions in the families. They are kept in old trunk boxes, under the
pillows or in tin boxes in the kitchen. Since each member of the family goes
for work, each of their savings are thus kept.
It is on this income
that the Maharajah of India has set his eyes on.
It is this sense of securely
that is being snatched away, without provision of any convincing substitute.
And sitting in the
cool comforts of air conditioned cabins, we have the galls to ask, why 4500 rupees is
not enough for a person? ‘Why the same
person should come back again? - put a mark on his finger. Let him depost his entire amount in the bank
and withdraw it as others do.’
The miniscule number of persons
who had been foolish enough to hold their illegal money in cash (without investing in the methods explained earlier) would have by
this time used the loopholes in the law to launder them or convert them into
gold or pass them on to benamies in some form or other. They will not be there in the queues of the banks and post offices.
It is the wage earners who did not depend upon
the banking system who have been forced to queue up. They do not want to speak out because they
are afraid that their bread would be lost.
The small amounts, precious as their lives, have to be at any cost, got
converted into the new legal tender. For that, they will endlessly stand in
queues, pay any amount as commission, or stand any insult.
And that patience
will be termed as their consent – for nation building.
