Baba Ramdev and his cohorts are enacting a made-to-order soap-opera for the story-starved TV channels. But how many of the protesters who are chanting slogans against black money understand the hurdles to recover black money? Do the protesters imagine that they are innocent of the crime themselves? Each time, you pay a bribe to an official to get your job done, you are the cause of generation of black money, however small. The same holds true for corporate, in a larger scale.
The Union Finance Minister Pranab Mukherjee within the last few of May 2011 declared the establishing of a Directorate of Criminal Investigation in the Income Tax Department to handle tax offences associated with unlawful actions and to identify crimes or scammers by searching for the flow of black money prior to, in the course of and after a felony is perpetrated.
In April 2011, the government constituted a multidisciplinary panel, composed of top authorities of various departments, to supervise and synchronize investigations into instances of money laundering and hoarding of unaccounted wealth in safe countries.
The Impact of black money
A healthy economy expands, to a large extent, on the money that comes to that country's government as tax revenue. The generation and circulation of black money causes great losses to the country's treasurer. The following are some of the other ways in which black money can affect a country's financial and social progress.
Misuse of productive resources
Black money in an economy tends to cripple the free flow of a country's resources in the right direction. It also widens the income gap. Salaried individuals, especially those in the lower rung of the corporate ladder, do not see their incomes rising unlike those in the higher echelons as it can be safely assumed that the latter group has huge sources of unaccounted income, the vindication of which comes from news reports virtually on a daily basis.
An impediment to a country's growth indicators
The presence of unaccounted money acts as a block on the right assessment of a country's progress. The assessment of a country's progress is dependent on the accurate calculation of the savings-to-income ratio and sector-wise composition of national income. The floating of black money would obscure true figures. When black money is parked in so-called safe tax havens overseas, the country also innocently becomes a ‘lender’ of capital to more advanced and wealthier nations.
Supports Criminal and Terrorist Groups
Finally, black money needs brute ‘street power’ for its protection and proliferation as well as accounting experts, liaison officers who negotiate between black money operators and political leaders. It corrupts the entire social and political fabric of a country.
The government has commissioned a study to be undertaken by three top economic think tanks to estimate the extent of black money or unaccounted income generated both within and outside of the country, a finance ministry statement said on 29 May 2011.
On Saturday, the government had appointed a high level committee of tax officials to suggest measures to tighten laws to curb the generation of black money.
The two moves have been announced days before an anti-corruption protest is to be launched by yoga teacher Baba Ramdev.
The UPA government has faced strong criticism from courts, Opposition parties and civil society groups for its handling of the issue of black money and corruption in public life. The government has taken some measures to counter the criticism and has engaged with authorities in tax havens to get information about money hidden away in these countries.
The three institutes selected to undertake the study are National Institute of Public Finance and Policy, National Institute of Financial Management and National Council of Applied Economic Research. The finance ministry statement said the three institutes had launched their study in March and are expected to complete the project within 18 months. The study is expected to bring out the nature of activities that encourage money laundering and its implications for national policy.
The study will also focus on the kind of activities which promote money laundering and identify important sectors of the economy in which unaccounted money is generated and causes and conditions that result in the generation of unaccounted money. It will also examine methods employed for generating black money and conversion of such funds for legitimate activities.
The institutions have also been asked to suggest ways and means for detecting and preventing unaccounted money and bring it into the mainstream economy. They would suggest methods to be used for taxing black money stashed in foreign countries. The study will also estimate the quantum of non-payment of tax due to evasion by registered corporate bodies.
The government has so far maintained that there are no reliable estimates of black money generated and held within and outside the country. It says the different estimates of the quantum of black money range between $500 to $1, 400 billion. A study by the Global Financial Integrity Group has estimated the illicit outflow at about $462 billion. The finance ministry says these estimates are based on largely unverifiable assumptions and therefore the government has undertaken the study to find out the actual size of the black economy.
Global Financial Integrity (GFI), a Washington-based organisation, estimated the illegal outflows from India to be $27. 2 billion every year on an average during the five years period 2002-06. Dev Kar, an economist of this institute, estimated an outflow of $462 billion (equal to Rs20 lakh crore) during the period 1948-2008. As high as 72% of the illicit assets generated in India are estimated to be flowing abroad. Another estimate of the aggregate black money is Rs71 lakh crore. Prof Arun Kumar puts the black money at 50% of the GDP of the country. Finance minister Mukherjee too put the estimate between $462 billion and $1. 2 trillion. Even the finance minister seems to have no clue.
Arun Kumar says more than 40 committees have gone into studying different aspects of the problem so far and had come out with thousands of measures.
It is true that the government has taken many steps earlier which include demonetisation, voluntary disclosure schemes, payment through banks, through cheques etc. Even now, some people demand that high value notes — Rs1000 and Rs500 — should be withdrawn, believing that the earners of illegal money hold their wealth in the form of these currency notes.
The measures did not work; if at all, they worked in such a way as to give additional benefits to tax evaders who could bring some of their unaccounted money over ground.
Pranab Mukherjee announced his five-point action-plan, comprising joining the global crusade against black money; creating an appropriate legislative framework; setting up institutions for dealing with illicit funds; developing systems for implementation; and imparting skills to the government officials for effective action. But he has prescribed this method without diagnosing the disease of black money.
Experts have the opinion that high taxes and complex laws are the main causes for tax evasion and piling up of the black money. But experience has shown that both the assumptions are wrong.
If high rates-evasion correlation were correct the black money would have fallen drastically, not shot up. Tax rate was close to a high 98% in 1971 when the black money was equal to 7% of the GDP whereas the rates have been brought down to around 30% now when the black money is supposed to be peaking at 50% of GDP.
Proposals to Deal with Black Money
The government has received a number of proposals from experts on ways to bring back to India the wealth allegedly funneled away into banks in offshore destinations such as Switzerland, Mauritius, Liechtenstein, etc.
A proposal for amnesty by K V M Pai, former income tax chief commissioner, sent to the Central Board of Direct Taxes (CBDT) and the Prime Minister's Office before the last general elections, is now being heard by the Supreme Court. The amnesty offers immunity with some conditions-30% tax plus interest. The apex court, after the preliminary hearing of the petition, asked him to tie-up with jurist Ram Jethmalani, who has also filed a similar petition before the court.
Another proposal to formulate an amnesty scheme, was from Y P Trivedi, senior tax lawyer, member of Rajya Sabha (NCP) and the director on the board of a dozen companies, including Reliance Industries Ltd. In a letter sent to Finance Minister Pranab Mukherjee in June 2010, Trivedi had proposed tax-relief bonds, subscribing to which the taxpayer would be eligible for immunity to be provided under the direct and indirect tax laws besides Foreign Exchange Management Act (FEMA). He also recommended immunity from other Central and state Acts. Trivedi's proposals also suggest certain interest rate on such bonds: 4% on five-year bonds, 5% on 10-year, 6% on 15-year and 7% on 20-year bonds. The scheme envisages eligibility to all Indians, NRIs and foreign nationals of Indian origin. According to him, the duration of the scheme should be six months. He stated that the income-tax department should ensure that they would not ask subscribers to reveal the source of funds.