'Black Money’ white paper: Ten things to note

Pranab Mukherjee, India’s finance minister, refrained from putting out a number on the amount of black money stashed within or outside India. Some estimates put the number for India at over $ 100bn. The report makes some interesting point and gives some useful numbers.

Here are ten things to note:

• Definition of black money: There is no uniform definition of black money in the literature or economic theory. In fact, several terms with similar connotations have been in vogue, including ‘unaccounted income’, ‘black income’, ‘dirty money’, ‘black wealth’, ‘underground wealth’, ‘black economy’, ‘parallel economy’, ‘shadow economy’, and ‘underground’ or ‘unofficial’ economy. All these terms usually refer to any income on which the taxes imposed by government or public authorities have not been paid. Such wealth may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and corruption. ‘Black money’ can be defined as assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.

• Concealed income: In search and seizure action under section 132 of Income Tax Act, the Investigation Wing of the central board of direct taxes or CBDT detected concealed income of Rs 19,938 crore in the last two financial years. Focused searches have been conducted in a number of cases in the current year on the basis of information received from foreign jurisdictions under the provisions of direct tax avoidance agreement or DTAA.

• Under-reporting: Surveys under section 133A of Income Tax Act are an important tool for ensuring that businesses are carried out according to the rules and taxes are paid in time, particularly in the micro, small and medium enterprises (MSME) and unorganized sector. Since April 2009,the Income Tax Department has detected under-reporting of income to the tune of Rs 11,800 crore in surveys, and collected due taxes thereon.

• Mispricing: The Directorate of Transfer Pricing has detected mispricing of Rs 67,768 crore in the last two financial years (Rs 44,531 crore in the current financial year). This has effectively stopped transfer of equivalent amount of profits out of the country. The Directorate of International Taxation has collected taxes of Rs 48,951 crore from cross-border transactions in the last few financial years. Transfer pricing is the amount charged by one part of a business for providing goods or services to another part for calculating profit and loss.

• Real estate sector: The real estate sector in India constitutes about 11 per cent of the GDP. Investment in property is a common means of parking unaccounted money and a large number of transactions in real estate are not reported or are under-reported. This is mainly on account of very high levels of property transaction taxes, commonly in the form of stamp duty. High transaction taxes in property are one of the biggest impediments to the development of an efficient property market. With tax rates of over 5 per cent being imposed as stamp duty on buying of property, which otherwise also involves high transactions costs in terms of search, advertising, commissions, registration, and contingent costs related to title disputes and litigation, the property market remains one of the most inefficient asset markets in India. Unless the underlying distortions in this market are taken care of by appropriate reforms, it may be difficult to prevent such misuse.

• PAN cards and returns: Till date, PAN has been allotted to more than 11 crore entities while income tax returns have been filed by 3.5 crore entities. There is thus a huge gap between the number of entities to whom PAN has been allotted vis-à-vis the number of deductors filing income tax returns. The Parliamentary Standing Committee for Finance has pointed to this gap and advised the Department to take suitable action. Such action again needs adequate manpower as well as persistent action towards ensuring that the provisions of PAN are implemented and accurately complied with.

• Whistle-blower policy: In India, the law has not been able to provide adequate protection to informants / whistleblowers, nor do government departments have effective witness-protection programmes. As a result, credible information is not forthcoming and witnesses either do not turn up or turn hostile resulting in acquittals in prosecution cases. The DCI in the CBDT has been empowered to run such a programme. Accordingly, a witness-protection law can be considered as an option. Subsequently, witness-protection programmes may need to be implemented by all law enforcement agencies.

• Amnesty scheme: One of the options suggested for bringing back black money stashed overseas is scheme for voluntary disclosure of such deposits. This option has been successfully adopted by some countries (USA, UK, France, Germany, etc.). In these schemes, only partial benefits in the form of immunity from prosecution were made available in lieu of voluntary disclosure, as taxes along with lumpsum interest and penalty has to be paid. In the past, India has also opted for voluntary disclosure schemes. A similar scheme, targeted at black money stashed abroad can be a one-time option, in view of the increasing capacity of tax administration to access information from foreign jurisdiction. However, these schemes have also been criticized for creating future expectations of similar schemes and resultant moral hazard.

• Gold deposits: A gold deposit scheme has also been suggested from some quarters in this regard which essentially provides that if the depositors part with gold now, they will get it back as gold. This may also carry a nominal rate of return and should be transferable so as to be used as collateral for sale. The most important part of the scheme is that there should be complete tax immunity if the holders come forward to make the deposit and the depositors ought not to be asked where they get the gold from. However, the issue of complete tax immunity needs to be examined in light of other policy objectives.

• Misuse of corporate structure: The Vodafone tax case provides an instance of the misuse of corporate structure for avoiding the payment of taxes. In this case, the Hutchison Group had made investments in India from 1992 to 2006 through a number of subsidiaries having ‘separate corporate personality’ but which were essentially post box companies based in the Cayman Islands, British Virgin Islands, and Mauritius. The Hutchison Group sold its entire business operation in India in February 2007 to the Vodafone Group for a total consideration of US$ 11.2 billion and the same was effected through transfer of a solitary share of a Cayman Islands company. When the tax authorities requested the accounts of the said company, the answer given was that as per Cayman Islands law, the company was not required to prepare its accounts.