The Hindu Business Line : When money becomes menacing

Thirty-six Indians have made it to the Forbes magazine's latest list of billionaires. Only the US, Germany and Russia have more number of billionaires than India. Surprisingly, the Finance Ministry has no details of the wealth and income of these billionaires and it relies on the data supplied by the Income-Tax Department. Shares, and securities and residential palaces are all exempt from the levy of wealth tax. Is it that what Forbes magazine can find out is beyond the reach of the Finance Ministry?

Public display of ostentation is happening like never before. Leave alone marriages celebrated in aeroplanes, on ships or old Maharaja's palaces, Indian billionaires are now the proud owners of luxurious yachts, jet aircraft and limousines worth several billions of rupees.

Do our millionaires pay their taxes? Is the Government justified in its boast that income-tax collections have almost touched the target and surpassed Rs 2 lakh crore? Has the Government chosen to turn a blind eye to the generation and proliferation of black money in the economy? How come in the on-going big debate about inflation and measures to curb it, no mention has been made of the impact of black money?

MNCs and Tax havens

Of late, global corporations have found it profitable to operate from India. They are able to move money instantly and anonymously across borders. Even as we talk about developing Mumbai into an international financial centre, it may be useful to keep in mind what overseas financial centres are all about. The rich and the mighty, whether Indian or foreign, make use of overseas financial centres as tax havens. Global tax revenues lost to such havens are said to exceed $255 billion a year. Small jurisdictions such as Bermuda, Luxembourg, Cayman Islands, British Virgin Islands, Dubai, Switzerland, Jersey, and Hong Kong have enabled corporate entities from developing countries such as India to shift chunks of their profits and escape local taxation. By allowing companies and affluent individuals to transfer wealth, the overseas financial centres sap the tax revenues of developing countries. As a result, tax burdens in these countries are being borne by the not-so-affluent labour class. As a former US Treasury official noted, globalisation is rigged against the average citizen.

Tax competition is good up to a point but beyond a certain level, it only encourages tax evasion. Two University of Michigan professors conducted a study and identified 33 tax havens.

These enclaves had a tax system that foreign capital finds attractive, as corporate taxes are low. For giant MNCs, because of fierce global competition, being tax efficient is as important as keeping down labour costs and overheads. The US barred "corporate inversions" which enabled companies move their headquarters to a tax haven to slash tax bills.

The problem of shifting profits abroad to escape local taxes became so acute in the US that in 2004 the President, Mr George Bush, signed into a law a one-off tax amnesty slashing corporate tax rates from 35 per cent to a little over 5 per cent to enable repatriation of funds stashed abroad. American companies repatriated $350 billion from the previously untaxed profits. Commented The Economist, "It was as if America had swallowed Sweden." The sudden spurt in stock market activity in the last two years can be attributed to the flooding of the market with FII (Foreign Institutional Investors) funds.

FIIs in India

A major part of the funds flowed in from Mauritius with which India has a controversial Double Tax Treaty Arrangement. For years, critics have been pointing out that the so-called foreign funds are not really foreign but represent recycling of the profits of Indian corporate houses, or what is called round-tripping.

Hedge funds are banned in India. But they can make their way into Indian markets through Participatory Notes (PNs). The Reserve Bank of India has pointed out that funds going out of the country come back via the PN route to claim tax advantages. It is inexplicable that the Government should be impervious to the quality and ownership of the coming in through the PN route. Over 30 per cent of the estimated $52 billion invested by FIIs are said to represent PN funds. It is a pity that neither the latest Budget nor the Finance Act, 2007 had anything to say about tackling the problem of tainted money flowing into India.

The US, the UK, Australia and Canada have been cracking down on various forms of tax evasions through the online payment system. They have set up a Joint International Tax Shelter Information Center (JITSIC) to share information on abusive tax shelters and their promoters. Their transfer pricing laws are getting more stringent. In such a milieu, India cannot be lagging in tracking down the massive tax evasion that seems to be happening in the country. In fact, India ranks poorly in Transparency International's listing of corrupt nations. Black-money is not a fund. It is a flow. It requires the concentrated efforts of all the authorities to stamp it out.

India has honest men at the helm. Can we not depend on them to do the needful against black-money?

(The author is a former Chief Commissioner of Income-Tax.)

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