Budget 2015: Draconian black money law won't work without one-time amnesty

Budget 2015-16 has a lot of things to say on black money, and promises to wield the big stick against black money holders in India and abroad. Arun Jaitley’s announcements and proposed actions embed three elements: one is to deter black money generation by disincentivising cash transactions; the second is to improve the government’s ability to track potential black money deals by monitoring and sharing information with the investigative agencies; the third is about changing laws to increase punishments for holding undeclared black money abroad or at home. All three are needed, but are essentially draconian in nature. They will enable the taxman and the investigating agencies to wield enormous power against citizens. The potential for corruption and graft will escalate, not reduce if these powers are not counter-balanced with safeguards. Draconian laws can be justified only if people are offered a chance to come clean. Or else, they will not work. [caption id=“attachment_2130387” align=“alignleft” width=“380”]  AP image[/caption]For example, the Finance Bill includes a “proposal to amend the Income-Tax Act to prohibit acceptance or payment of an advance of Rs20,000 or more in cash for the purchase of immovable property. Quoting of PAN is being made mandatory for any purchase or sale exceeding the value of Rs 1 lakh.” This sounds innocuous, but how will any taxman know if I have paid more than Rs 20,000 in cash when I buy property when reported transactions may anyway be undervalued to avoid stamp duty? Will this be done by intrusive checks of bank accounts or by aggressively querying property sellers and buyers? Then again, the finance minister announced that “third party reporting entities would be required to furnish information about foreign currency sales and cross-border transactions. Provision is also being made to tackle splitting of reportable transactions. To improve enforcement, CBDT and CBEC will leverage technology and have access to information in each other’s database.” It is always a good idea for the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC) to share data; presumably, the data will also be shared with the Enforcement Directorate which looks at the foreign money laundering angle. One also presumes that the reference to “splitting or reportable transactions” includes domestic real estate, which is where this happens often in order to avoid higher stamp duties. Once again, without safeguards built into the law, citizen data will be in the hands of tax sleuths who could misuse the information for various reasons. Also, the mere access to data should not be a license to launch fishing expeditions against all and sundry. The law clearly needs to draw a balance between the need to prevent black money generation and the citizen’s right to non-intrusive surveillance and privacy. The third issue is the draconian nature of the penalties proposed. Just as giving rapists a death sentence does not do much to deter rape, laws with excessive punishments may not do much to deter potential crooks. It is the certainty of punishment that is vital. This needs changes in the legal system, and speeding up court cases. Among other things, Jaitley has proposed that “concealment of income and assets and evasion of tax in relation to foreign assets will be prosecutable with punishment of rigorous imprisonment upto 10 years.” Further, these offences will not be compoundable (which means the offender will not be able to pay penalties and settle the issue), but the penalties will nevertheless be a hefty 300 percent tax on concealed assets and income. Even the non-filing of returns or inadequate disclosure of foreign assets will lead to prosecution that could lead to imprisonment up to seven years. Jaitley also told parliament that “abettors of the above offences, whether individuals, entities, banks or financial institutions, will be liable for prosecution and penalty.” This means HSBC Bank, which was recently at the centre of a scam involving illegal Indian accounts in Switzerland, could have been prosecuted in India, in case the law had been in operation before the disclosures. There is nothing wrong in prosecuting abettors and the primary crooks involved. But when the law is made so stringent, it is important also for the government to make it prospective – and give those who concealed income and assets abroad or in India a last chance to come clean. This won’t happen without a formal amnesty scheme that protects identities even while earning back-taxes. Two reasons why. First, black money faces both a stock issue (accumulated black wealth generated during years of crony socialism and a controlled economy) and a flow issue (creation of more black money due to lopsided or high taxes, the need for massive election funding, and the retention of discretionary power in ministerial and bureaucratic hands. Second, there is both a demand issue and a supply issue. There is a huge demand issue because elections are funded largely through black money. State funding of elections is thus a prerequisite for reducing the demand for black money at the wholesale level by politicians. The supply of black money will diminish if discretionary power in the hands of decision-makers can be reduced dramatically or eliminated. The last issue is being addressed partly at the central level by holding auctions for scarce resources (spectrum, coal), by reducing red tape in central clearances (green nod, wildlife nod, etc) and by eliminating inspector raj. But at the state level, these discretionary powers remain entrenched. And the sector with the highest potential for future generation of black wealth (and benami ownership) is real estate, where the sheer number of municipal and other clearances needed ensures that more black money is generated and stored in benami properties. The stock issue and the flow issue are also inter-related. If I am sitting on a huge stash of black money, I cannot use it without insisting that I make future payments in black money. Or I will have to send it abroad through the hawala route and bring it back by calling it foreign investment. Excessive black money stock ensures that black money will continue to be generated in future too, even when the laws change to make punishments more stringent. The only realistic way to deal with the stock issue is to offer an amnesty scheme so that some of the high levels of black wealth held abroad or at home can now be tapped and put to constructive use – to aid the poor and for building infrastructure. The elimination of avenues for the deployment of black money held abroad – the use of participatory notes to invest in Indian stocks anonymously – will also have a negative impact on foreign flows, with bad consequences for the stock markets and investor sentiment. Once again, banning P-notes will need counter-balancing the stoppage of flows by encouraging them through an amnesty scheme. An amnesty scheme could offer anonymity for disclosures after payment of the requisite tax before the new, more draconian anti-black money laws kick in. Thus the carrot can be offered with the big stick. A stick without carrot may not work. As I wrote earlier, “black money is as much as economic issue as a moral and ethical one. It gets generated when the laws allow the creation of rent-seeking opportunities in various industries (real estate, spectrum allotment, export and import regimes, special tax breaks for certain industries, etc).” (Read that article here ). We have to end both the creation of m ore black money and help reduce its stock accumulated in the past.