Widening black money net

The Modi government made an election promise of eradicating black money. It made a boastful promise to put ₹15 lakh into the pockets of every Indian. Hyperbole apart, this government has systematically gone after unaccounted money.

Unaccounted money is due to many causes — complicated government procedures and approvals that require bribes to politicians and bureaucrats; desire to accumulate money overseas especially in tax havens; high tax rates, especially direct taxes, and the desire to evade paying them.

The unaccounted money is held in foreign bank accounts, as domestic and foreign real estate and other assets, as gold and jewellery. The owners could be politicians, political parties, individual and corporate businesses, commission agents, bureaucrats, private individuals, criminals and enemy agents with counterfeit money. Unaccounted money can also be laundered into “white” money. To do this there has to be a well functioning “hawala” mechanism which is believed to exist in many parts of India. Hawala takes the unaccounted money as cash and smuggles it overseas to safe havens where it is converted into foreign currency and invested in different ways including in bank accounts. The cash returns to India by a similar route. It is now available for investment in “black” assets which could be production entities, real estate, gold, jewellery.

India also provides a “laundry” which makes black money into white. Hawala is used to send the money to countries like Mauritius which have no capital gains tax. The money goes there and is then legally sent to be invested in say, stock exchanges in India, and when the shares are sold, the proceeds that are remitted back to Mauritius are now whiter. This happens with a few other countries like Cyprus.

Money is also sent similarly to Singapore where banks invest it for the owner but without his name, in investments in India. These “participatory notes” are another means to change the black money into white. Black money is thus money stolen from government by evading taxes or other means as described. Governments in India have done little over the years to close the loopholes that allow it to be generated and then accumulated.

What actions are needed to reduce black money? The first set relates to government policies. The marginal rates of income tax since the 1980s when they were around 85 per cent (plus wealth tax) began to reduce sharply from 1991. Now, they have come down to 33 per cent. Corporate taxes have come down as have excise and customs duties. Evading them is a bigger risk than before since tax authorities (and banks) are now linked by computers. They are much better informed about purchases and remittances.

The other step since 1991 was the removal of bans on some imports and sharp reductions in import duties. There is far less need to smuggle in goods for which foreign money is needed to make payments. Import of industrial materials and machinery were also much liberalised. Importers no longer had to find underhand ways to get more of the materials they needed. Computerisation also removed another source of black money generation, namely rail and air travel.

Another major forthcoming change is that we will soon have a uniform rate of sales tax nationally with the goods and services tax. The rupee has been stable in value for some years and there is less fear in holding on to rupees. There is perhaps more black money held in cash in the country than used to be the case.

A major source and user of black money is in transactions in land, construction and real estate. Sectors such as roads and highways, housing, factory construction can enable a promoter to take in black in the early stages of a project. Since most of the legislation and rules in this field are at the State level, little has been done to control this source of black money generation. Government servants in the different departments benefit, particularly in the metros.

There have been reports of many banks, and particularly foreign banks, engaging in hawala transactions. They would collect large sums of rupee notes from high net worth individuals and give them receipts in foreign currency from Zurich and other places. Amazingly, there were no reports of these banks and their employees having been disciplined. Of course, this operation also requires the availability of high value rupee currency notes so that they can be easily collected, transported, stored and distributed.

Politics and elections at every level also use great deal of black money. Large donations are often given to them in cash. The party uses the cash to reward its leaders, foot soldiers and to bribe the voters to cast their votes in the party’s favour. Again, this requires high value notes that can be collected, transported and kept safely.

In the last few years a class of whistleblowers has emerged. They have exposed names of Indians and others who have accounts in foreign banks. Some of these are repositories of black money. Switzerland, France, Panama are some of the source countries. The Modi government has carefully begun to close other loopholes. People who cheated on paying full income tax were given an opportunity to confess and pay. This brought in a good amount of unpaid taxes. Governments must be investigating the people with money in foreign bank accounts. Election officials have seized large sums of cash being transported during elections. The communications between banks, traders, and income-tax authorities has over the years, become speedier and voluminous so that large purchases, deposits and withdrawals could be investigated.

For many years Indian governments have tried to close the loopholes abroad, of which the prime examples were Mauritius and Singapore. Prime Minister Modi personally renegotiated the double taxation agreement so that the Indian capital gains tax would ebb charged on gains from Mauritian investments in India within three years. This closes that loophole with other similar countries as well.

India must investigate and publicly announce the results from investigating the names disclosed by whistleblowers. We must punish banks, however big, that engage in cleaning hawala money.

It does appear that the government had a plan of action to deal with black money. It started moving more speedily after the Modi government came to power.

The demonetisation of high value currency is an important step. Politicians preparing for elections are hurt badly as are many others holding black money that will now lose it all. Honest citizens will struggle for a few days but the situation is already becoming normal. To reduce the role of black money we need government to make most government permissions clear and automatic. We need far less hurdles on the path of doing business. We need much more bank than cash transactions (now 12 per cent of GDP). We need more use of plastic money, though not with the high debt component that has drastically reduced savings rates in the US.

This is now possible with the opening of crores of Jan-Dhan bank accounts, post offices as banks, government benefits directly transferred to beneficiary accounts. Punishments for tax evaders must become ruinous. India is trying to rid itself of a cancer that has taken years to take root. It must be swiftly removed.

The writer is former director-general, NCAER

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