Do you really want to root out corruption? Oh yeah?

One of the electoral promises which resonated with the electorate was to root out the cancer of corruption. The demonetisation of high-value currency was a step in that direction; but one that needed to be followed up with others. One of the main steps needed is to plug the loophole through which ‘black’ money turns into ‘white’.

This is the exemption from tax for any income declared to be agricultural income. It is not the ‘small farmers’ who benefit, but the big farmers, corrupt politicians and bureaucrats, businessmen and professionals. The simplest way to check this misuse would be to grant a generous exemption limit, say ₹25 lakh a year (10 times that for non-farmers) and then tax any income above that. This does not hurt a genuine small farmer but helps plug an obvious loophole. Why is this not being done? Are we serious about corruption? Oh yeah?

There are several other ways that have been devised to evade tax. These are well-known by tax authorities.

An article in Mint explains ‘how shell companies are used in black money creation, laundering’. The methods are well-known; why then, is action against preventing such acts so slow? Because the system provides a perverse incentive for corruption; if money is stolen, it is the thief, and not the victim, who has the funds to pay bribes.

Even laws have been thoughtlessly framed to carry this to a ludicrous extreme. The Prevention of Money Laundering Act (PMLA), for instance, till now, gave the State the right to expropriate stolen goods under the guise that they were ‘proceeds from crime’. This means that if the police were to watch a theft taking place, they would not prevent it but would let them empty the house so as to get a greater ‘proceed from crime’. It is only now that the law is being amended to restore the stolen property to those from whom it has been stolen. Serious about corruption? Oh yeah?

SEBI has recently cracked the whip on listed shell companies. One example. The tax evader buys, say, ₹5 lakh worth of shares in a thinly-traded company, at ₹10, and gets back ₹5 lakh in cash. Through a series of trades (controlled, since the stock is thinly-traded) the price is taken up to ₹100 a year later. The shares are sold for ₹50 lakh, and ₹45 lakh is laundered. What’s more, the long-term capital gains are tax free!

Why should money laundering be able to hide behind a ‘corporate veil’?

Much has been made of the sanctity of ‘lifting of the corporate veil’ in cases like NSEL. It is, though, a corporate veil, and not a corporate armour behind which crooks or launderers can hide in safety.

A recent article in The Economic Times concludes that the NSEL scam could have been nipped in the bud. It seems that a meeting of the Financial Stability & Development Council in May 2011 determined that NSEL was an unregulated entity and that those providing payment and settlement services to it had not received permission from RBI to do so.

The FSDC, a body meant to be a super regulator, has representatives from all regulators, including SEBI and the RBI. Why, when these lapses were minuted in the May 2011 meeting, was action not taken then?

If we seriously want to stop corruption, investigate this and punish those who failed to prevent it. If we seriously want to stop corruption, take stiff action against those who have been found to be corrupt, no matter how important he is politically. Justice is not a handmaiden for political compromises.

(The writer is India Head-Finance, Asia/Haymarket. The views are personal.)

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