12 November 2014

PLUG THE LOOPHOLES - The myth of getting back unaccounted incomes

http://www.telegraphindia.com/1141112/jsp/opinion/story_19028876.jsp#.VGLVNfmUfb4

COMMENTARAO: S.L. Rao


For decades now we have talked about stopping ‘black’ or unaccounted (and therefore illegal) incomes, physical and financial assets. Amnesty schemes forgiving past transgressions have worked only marginally. The twist that occurred mainly from the time of Indira Gandhi as prime minister was the holding of these in foreign bank accounts, usually in tax havens. Their growth was accelerated by commissions on government purchases of defense and other equipment. The subsequent twist was that these moneys got invested (as black money did in India) in productive assets overseas (real estate, stocks and shares, manufacturing and commercial establishments).

The initial cause of such illegal incomes being made was the high levels of income and wealth taxation. They tempted many to avoid these confiscatory taxes and not pay at all on all, or a substantial part, of the generated incomes. However, the development of rigid industrial and import licensing opened a new channel for illegal earnings and new outlets for their safekeeping. Under- and over-invoicing of exports and imports and for construction and purchases of plant and equipment became a major source for illegal earnings. The investor would pad the costs of construction, take commissions to be kept overseas if the supplier was foreign, and in cash if the supplier was local. Government officers who issued licenses of all kinds would take bribes to speed up the process.

The estimates of the amount of such illegal assets have received little attention. People have said that a fourth and up to a half of our gross national income is in additional black income generation. International agencies have said that Indians are the largest holders of illegal assets abroad. Estimates go to as much as $500 billion. Getting this vast amount of black money back into the tax net and illegal holdings abroad into our foreign exchange reserves has again become a matter of national interest. Political grandstanding has been an important reason for the publicity to this issue. Public statements that each Indian would get as much as Rs 15 lakhs each if we could get these assets back have also stimulated interest. This is humbug and an opiate for the masses.

Meanwhile, some names of Indians with foreign accounts abroad in a few banks overseas have been received by government. These are from a very few banks in Switzerland and Liechtenstein, though there are many other such tax havens like the Cayman Islands, Virgin islands, Dubai, Cyprus, and so on. Whatever has come to the government’s attention is a small fraction of the amounts held overseas. Leaving aside the question of how these names were gathered and what could be done about them, there was great glee that the names were with the government. There were demands from the lay public as well as from the media, which should have known better, that the names be made public. This was supposed to “name and shame” them. (This was said to me in a television debate by a Congress spokesman! Many names have been disclosed over the years, but none has displayed shame.) There are said to be legal and diplomatic reasons for non-disclosure. In any case, publicity to these names will help drawing room gossip, but do little to get the money back.

The committee of ex-judges appointed by the Supreme Court has apparently found that many of the names are those of non-resident Indians who are entitled to holding money abroad; so are resident Indians with the Reserve Bank of India’s permission. Also, the negotiations with these foreign governments and banks to disclose names of holders of foreign bank accounts are almost nine years old. It would have been stupid for someone to continue keeping money in such illegal accounts. The government was supposed to be making an effort to unearth the names of the holders. Many of the accounts have no balances, as expected, or have very little.

A serious attempt must be made to find out who are the offenders who hold assets in India or abroad on which no taxes were paid, or were amassed illegally (criminal rackets like drugs, trafficking of people, and so on). Having located the individuals, the government must enter into legal battles overseas to get the moneys back. It will take years for any result, and the likely result is negative.

Over the years, the people who have accumulated black money and assets in India and overseas have developed the government system and procedures to enable them to do so more easily. Thus a major portion of the defense equipment of India has made us the largest importer of defense equipment in the world. Our import policies have made many items like sugar or palm oil major import items. There are many others. Rent control and floor space index limitations have made Mumbai’s property very costly and a major generator of black incomes from property shortages. Very high property taxes in Delhi and elsewhere have made real estate a major generator of black money.

The public distribution system has vast leakages from procurement, price that enable leakage, transportation, storage and bogus ration cards. The vast social expenditures by the Sonia Gandhi-led government generated huge leakages and consequent black money. This is only some of the schemes designed to enable such black income generation. Government ministers and bureaucrats have designed schemes to ensure that much illegal money can be generated by siphoning off as much as 50 per cent or more of government expenditures.

As far as the present accumulations are concerned, black money in India is invested in real estate and to a large extent in industrial and commercial businesses; illegal money held abroad is used to finance drugs smuggling and other criminal activities, and increasingly into real estate and stock markets, as well as regular businesses and trade in foreign countries. It has been reported that Indians are the largest investors in London real estate. In any case, there has been enough time for them to run down the balances in these foreign accounts. I doubt that much will come out of this drive against black money in India, and unaccounted money held overseas.

It is more important, if we are serious about it, to plug the loopholes created over the years. Thus property taxes must be reduced; land transfers made simpler; investigations into economic crimes made speedier and with faster judgments and stiffer penalties including confiscation. The goods and services tax will cut evasion of indirect taxes and consequent accumulation of black money. The money laundering that government has enabled must be closed; these include the Mauritius route (with some others like Cyprus) for sending black money out, bringing it from there legally to India, laundered in Indian markets and sent back. I suspect that much of the FII investments that lead to sharp booms and busts in India’s stock exchanges are really because of these moneys coming in and going out. Participatory notes that enable Indians to invest anonymously in India through overseas banks must also be made transparent. Government schemes should stop procuring and distribution of goods and services. Instead, straight money transfers to identified beneficiaries will prevent theft of government money and generation of black money. If defense production replaces much of defense imports, that will also stop much accumulation overseas. Severe penalties for over- and under-invoicing might help to reduce it.

The present brouhaha about getting back unaccounted incomes is a sham. We must close the loopholes and prevent them from recurring.

The author is former director-general, National Council of Applied Economic Research

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