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Suddenly, it has become fashionable in India to talk about black money and behave as if it is the root cause of all problems and we all will become prosperous no sooner black money is put to tax net within the control of our dear government which has long defined public interest as its petty revenue interest only. Let us examine merit of this issue.

What is black-money ?

There is unanimity that money that has not suffered taxation, is black-money. Here, taxation is not just income tax or wealth tax, but must include excise duty, service tax or vat as well. In fact, once money escapes excise duty, it is bound to escape vat, income tax and thereby, wealth tax as well.

Source of black-money

We can imagine, there could be two sources of black-money:

i. Corruption ie bribe to government officials and politicians, from lowest to the highest. Yes, it also goes to purchase officers and quality approvers in private sector but at much smaller scale. It just can’t be in large scale in private sector where large scale bribe cannot remain secret, and once exposed, top management cannot overlook it. In contrast, in government, exalted prosperity of the officials and politicians is an open secret. From paupers, they quickly become owners of thousands of crores which simply doesn’t matter to our system at all. This source is not only guilty of criminality in letter and spirit, but also of an offence of tax evasion. Yes, even bribe money is liable to income tax (and TDS as well) should one declare it in his tax return.

ii. Tax evasion in commercial transactions i.e cash transactions by people with an intention to evade taxes but occasionally also to evade policy roadblocks. This could be in anywhere from vegetables and kiranas to real estate. This could also be due to government policies taxation is too high for business to be viable or where no returns are allowed in white money as in educational institutions (government wants the private sector to run them for charity only). This source is not criminal in spirit, but guilty of an offence of tax evasion.

The use of black-money

We can imagine the maximum uses to which the black-money can be put, as under:-

i. Investment into commercial activities by undervaluing real estate, projects, business assets and even small scale businesses etc. This may also be used for cash payment of wages to workers where employers do not want to register them with ESI and PF, both for the purpose of avoiding nuisance of labour laws as well as wanting to pay below ever rising stipulated minimum wages. Some businesses are simply unviable if run on full white, such as packaged drinking water, steel foundries or re-rolling, adat (food grain wholesale in mandis), or unorganized small scale builders etc. Few others are not allowed to be run as business like educational institutions where returns have to be black money and nothing else. If strict accounting and taxes are enforced on these activities, most of them will close down anyway hurting economy big time (like lust for revenue from Vodafone hurt India badly, both growth as well as face).

ii. Benami investments into companies mostly listed ones where thousands of shareholders can be recorded in company books to have contributed small amounts into share capital. Naturally, these ghost shareholders will never attend any AGMs and the promoter who would be holding a small number of shares in his own name officially, is quietly controlling the entire company and the black money deposited into company accounts in the name of these thousands of ghost shareholders has already become white money. There can also be layers of companies to channelize big amounts with bogus addresses and bogus directors. Gadkari and Saharas are reported examples of such application.

iii. Conspicuous consumption, specially high end like in multi-crore rupee weddings, super luxury cars running into crores of rupees, high end fashion products, sky scrapper residential house like Ambani’s or Palace in London like Mittal’s and so on.

iv. Rerouted as FDI/FII through tax havens which becomes white money once it lands in India and is subjected to all regular taxes on transactions and income except to the extent of double tax avoidance treaties with these routing countries where applicable, and finally

v. Massive gold purchases which are believed to have caused huge current account deficits, because gold is easy to buy in cash, easy to store and can remain secretly guarded for ages.

vi. Swiss bank accounts where money just sits in for ages.

This whole issue is of perception because no data are available and we just don’t know how much money is put to which of the above uses. Still, considering human nature, we can reckon that the first four types of uses are definitely productive uses where black money gets invested in national economy for productive uses, and is contributing growth of our economy. The only grudge could be that it has not suffered taxation at the time of its generation, and when its source is bribe, it fuels corruption and leads to illegitimate things done through such bribes like cornering of coal blocks or spectrum etc which could hurt nation.

The routing of money through tax havens should not be a problem to government who wants to attract investment into the economy even if it is black. That it is compelled to permit benefit of tax avoidance treaties to such domestic investment disguised as foreign, should also not matter much because government keeps offering incentives and exemptions to stimulate investments anyway. It must deem to have offered exemption for investment of this money through this route. When it can waive income tax, sales tax, excise duty and service tax on all business generated in more and more territories like Jammu, Baddi, Kutchha and NorthEast, what is the problem is extending benefit of double taxation avoidance treaties to this investment which is brought back home? Or, is it that we want to discourage this investment and force investors to explore other avenues whether in foreign countries or swiss bank accounts? Will that serve higher national interests?

Parking black money in gold is an emotional issue, relatively insignificant in substance. India imported 845 tons of gold in 2012 after which gold smuggling resumed thanks to finance ministry for higher import duties and other restrictive controls. Assuming that half of this quantity is used for parking black money (at least half must be going into legitimate demand for jewelry etc), 422.5 tons gold was used to park black money in 2012. At say Rs 25000 per 10 gms, this must have amounted to Rs.105,625 cr. Indian economy (GDP) was $1847.7 billion ie, Rs 110 lac cr at an exchange rate of Rs 60. This black money parked in gold thus, didn’t even come to 1% of the economy! Hardly enough to agitate prudent Indians, isn’t it?

The real black money that is not being counted in our economy and is not helping our economic development is one that is parked in swiss bank accounts. How big is this money, no one knows. It can be just a few thousand crore rupees (much less than a fraction of a percent of our GDP) or could really be in lacs of crores of rupees as emotionally agitated activists like baba Ramdev will have us believe. We don’t know magnitude of this money but can imagine who could be the owners of this black money. Are they businessmen or are they our rulers?

Are they businessmen or are they our rulers?

Keeping money in swiss bank accounts does not generate any returns. Instead, it costs money in bank charges. Therefore, one will resort to such mode of keeping black money only when he does not have any better or more productive mode of investment. Since businessmen always have better avenues to invest such money, no matter how big it is, they can be expected to be wise enough to make productive use of this money in their business where they also have loans and liabilities costing them interest. No prudent businessman will keep his money idle in swiss bank accounts, incur charges on such bank deposits and also keep paying interest on loans and liabilities in his business. Vijay Mallya will not keep idle money in swiss banks and allow King Fisher to hurt his ego and image at home. Even the disclosure of such foreign bank accounts involving Mukesh Ambani and HSBC Bank, spoke of just Rs 100 cr for Ambani. Thus, we can safely deduce that businessmen are unlikely to keep their money idle in swiss bank accounts in big way. They may be keeping small amounts for freedom of expenses overseas or fancy assets overseas more for esteem purposes than anything, afterall, shauk bhi khujh cheese hai.

If a lesser known businessman is found with lot of money in swiss bank accounts, like Hasan, an obscure Stud Farm owner from Pune with tax arrears of Rs 40,000 cr in news a few years ago, he is bound to be only a front for government officials and/or politicians. We are unlikely to ever hear about an Ambani, Mittal or Premji to be found with big money in swiss bank accounts. Their black money is likely to be found in benami companies in tax havens, brought into their flag ships in India, or  in benami ghost shareholders directly in their domestic companies. Either way, it has already become white money and put to productive use.

This brings us to our rulers, government officials and politicians, with perceptible difference in the psychology of these two classes itself. Politicians are in a position to exercise power and influence, even when they lose elections and sit in opposition. This allows them to keep effective control on benami investments in real estate based investments like properties, hotels, housing projects, infrastructure based companies etc which involve huge amount of investments. Equally popular mode of investment in high class educational institutions like medical colleges which not only require huge investment but also need continuous support from politicians thanks to our policy of permitting investment in education through charitable institutions only and thereby, compulsorily making all returns from these institutions a black-money which these politicians can be expected to have mastered to manage.

This benami investment is also coming back to national economy and is being counted in our GDP, one way or the other. It is also suffering taxation post its application into such uses. The only grudge is that it has not suffered taxation at the time of its generation.

This means, politicians can be expected to be investing their black money through benami investments as above, to the extent possible. Beyond that, they must be transferring it to swiss bank accounts. Once money gone there, it only helps inflate their ego of owning thousands of crores of rupees which cannot be enjoyed in any other manner. Hence, swiss bank accounts should only be a last resort for them as well.

Finally, we have government officials who are a different specie altogether. They are far too timid (they get their juniors to write recommendations that they want so that they only have to put OK under their own handwriting and avoid any responsibility for decision making, go for committees {frequently a one man committee itself making the concept ridiculous even in pretention} all the time, always terrified to face responsibility and accountability, and so on) to risk their investment benami in a big way. They can’t trust their servants and even relatives except for small time investments. They may buy some property in the name of their relatives but are unlikely to make major investments benami into medical colleges, infrastructure companies or township projects. Of course, they have means but not in thousands of crores except for very few sitting at the very top in government or judiciary. If newspaper reports are any guide, any raids in a peon’s house yields Rs 5 crore, in a clerk’s house yields Rs 10 crore (raid in the house of a clerk in Jaipur Development Authority yielded Rs 200 crore) and in the house of IAS, though rare for apparent reasons, yields nearly Rs 400 crore!

Knowing the character of these officials, they are unlikely to have massed lacs of crores in swiss banks. Their combined loot parked in swiss banks should not be more than a few thousand crores.

Tax evasion – how real or justified is this grudge

No doubt that all black money has escaped taxation, else it would not be black. Government is theoretically right to grudge that it has lost revenue. But a tax payer would be entitled to ask,

i. Whether government’s thirst for revenue will ever be satisfied? Total tax revenue to center was Rs 13,149 cr and to states was Rs 6,614 cr in 1980-81 when they were desperate for more revenue and sold liquor, opium and other narcotics to make up. Come 2011-12, there revenue has swollen many times to Rs 932,440 cr and Rs 527,021 cr and yet they are selling liquor, opium and other narcotics in much bigger way. Suppose, tax payers decide to pay all the taxes on this black money, will it satisfy the government’s lust for revenue? Will they still not keep hunting for more and more? This lust is insatiable. Now, toll taxes are enforced even before roads are built. Government is collecting upfront premium for letting them build roads with their own money such that toll taxes not only cover the cost of building such roads on BOT basis but also make government richer for other purposes through upfront premium. and

ii. Whether government is spending our tax money properly? We pay taxes by forgoing consumption or investment ourselves hoping that it will result in creation of a public investment or public good. When we find that our tax money is only used to enrich the rulers or to help them bribe the voters for keeping themselves in power, surely we will not be impressed with any advertisements of nation building. We know that more taxes will result in more freebees to voters like free mobiles, free laptops and may be, free motor-cycles. If govt can distribute almost free foodgrains to 67% population when it is has always been bankrupt, who is stopping them to perpetuate bankruptcy regardless of revenue it gets?

We are wise enough to see that there is nothing we get in return for our taxes. Police needs to be paid even for passport verifications. Usage need to be paid for use of new airports. Toll taxes need to be paid for use of highways even after having paid road tax while purchasing vehicle and road development cess while buying fuel. Our consumption not only includes indirect taxes like excise, service tax, vat, entry tax, cesses, octroi and what not, but also cross subsidies for dole outs to vote banks pushing up prices payable by us. Tuition fee for our kids includes free education to 25% students thanks to RTE. Our electricity charges include subsidized or free electricity to slums and farmers. Our air travel includes cost of free passes to employees and their families of Air India, and so on. So, we pay tax even when we think we don’t.

In fact, had India been a country run on rule of law (we rank in bottom 10 percentile in world ranking), we would have get court directive to government to abstain from any new revenue raising measures UNTIL it can certify to have plugged all leakages of revenue and guaranteed proper utilization of whatever revenue it is getting. That it is winning elections doesn’t mean its policies are approved by people who only have to choose between a devil and deep sea. Can the government hold a referendum and ask TAX PAYERS whether they believe government is using tax money property? Don’t ask beneficiaries of dole outs. Ask those who contribute revenue. Any courage to look into the mirror? No way ………………….


Published by

CA Anil Garg
Category Taxpayers   Report

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