Black money chase likely to flop: Jaitley, Modi have allowed politics to trump economics

(This article was first published on 2 July.)

The Modi government’s three-month compliance window for holders of illegal wealth abroad is more about the politics of black money than a realistic roadmap for its reduction and ultimate elimination. The scheme is more stick than carrot, and it is highly unlikely that the big fish will bite. Populist politics has trumped sane economics.

The compliance window, which opened yesterday (1 July) under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, allows Indians with illegal assets or incomes abroad to declare the same to the taxman with the promise of no prosecution. Those who disclose their assets by 30 September will be given another three months to pay the tax and penalty by 31 December.

So far, so good. But the terms of the law are so daunting that only minor holders of black wealth will even be tempted to comply. Reason: 60 percent of the income will be taxed, comprising 30 percent tax and 30 percent penalty.

If you have, say, Rs 10 crore of illegal wealth abroad, it may make some sense to declare it and pay Rs 6 crore to the taxman in the hope of avoiding future harassment. It is not a great sum to forgo for some peace of mind.

But what if you had Rs 1,000 crore in the Cayman Islands? Why would you want to pay Rs 600 crore to the taxman? If you have that kind of hoard abroad, it may be well worth the risk of courting tax troubles at home. When you have so much illegal money, it means you have the resources to keep the taxman away from the loot too.

 Black money chase likely to flop: Jaitley, Modi have allowed politics to trump economics

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And that’s not the only deterrent. Even though the finance ministry has promised to put only tax officials with a proven record or probity to run the cell which will accept declarations under the new law, there is no legal guarantee that your identity will be protected. Now, why would Crony Businessman X, with hundreds of crores abroad, want to be known to the Indian taxman by name. If anonymity can be compromised any time, it takes away the main attraction of the scheme. There is no guarantee that the name will not leak out at some later date, inviting extortionists into the game.

Finance Minister Arun Jaitley has been at pains to emphasise that this is not an amnesty scheme - and no one needs convincing on that. In fact, it is a punishing scheme intended to tell the public that you are going to clobber black money holders. Politically, it may be useful to let everyone know that the Narendra Modi government does not sup with crooks and the crony rich, but it won’t do anything to either bring more money to the exchequer or reduce the future build-up of black money abroad or at home.

Another bill, the Benami Transactions (Prohibition) (Amendment) bill, 2015, wants to deal equally severely with domestic black money and could be passed in the monsoon session, provided politicians and news channels can tear themselves away from the Lalit Modi spectacle.

The two laws, on deal with foreign assets and domestic black money, are draconian and counter-productive for the simple reason that black money is not all about corruption and greed. Black money got generated in the past because government had the ability to damage businesses and created laws to extract rents in every possible way. Politicians funded their elections with black money, and businessmen were happy to help them in return for other favours that restricted competition and enabled super profits at the cost of the consumer.

The main provisions of the foreign assets law are that if an Indian has undisclosed assets of incomes after 30 September, and if he is caught, he will be taxed at 120 percent and possibly even sent to jail for 10 years.

Such stringent provisions will ensure not compliance, but will offer the taxman with an increased ability to extract bribes. Any info they have on corrupt businessmen can be suppressed for a price – a high price in view of the risks involved. More black money generated from the stringency of the provisions.

As for businessmen with existing large hoards abroad, the new law will encourage more of them to turn non-residents – so that they can stay out of reach of the Indian taxman. An NRI gets the best of both worlds – easy admission to the domestic business club, and immunity from the Indian taxman.

It is worth recalling that most of the black money sent abroad was created during the early days of the licence-permit raj – when top tax rates were (at one point) above 90 percent, and customs duties were extortionate.

Going back to the same situation of mistrust and draconian law is like turning the clock back on 25 years of economic liberalisation. Post-liberalisation, black money has been generated by crony allotments of scarce resources – spectrum, coal, land, etc.

The only sensible way of eliminating black money is to make it economically unattractive. It means the following:

First, make tax rates – including indirect tax rates - reasonable. While corporate taxes are moving in that direction, indirect taxes – especially export and import duties – are not at levels that will discourage overinvoicing and underinvoicing – two routes to generating black money abroad.

Second, capital flows must become transparent. While capital controls are slowly reducing, foreign portfolio investment is still coming substantially through participatory notes – where the ultimate investor is unknown. The chances are many of these investors are Indians with black money hoards abroad. P-notes hit a seven-year high of Rs 2.72 lakh crore early this year. That’s over $43 billion.

Third, domestic black money is generated largely in two ways – discretionary ministerial powers, and real estate controls. Discretionary power in the allotment of coal and spectrum has been reduced, and will happen in the case of other scarce resources too over time. But real estate shows no signs of transparency and liberalization - which is why prices stay high despite lack of consumer demand. Land is the most mismanaged natural resource where political discretionary power is at its peak.

Fourth, elections must be state-funded. Once this is done, the need for black money to fight elections will come down – and will become easier to expose.

Fifth, to reduce the existing stock of black money – both abroad and at home – we need an amnesty scheme with penalties, but there must be strict non-disclosure clauses to protect identities. This may not play well in the public sphere, where the mood is to “catch those b*****ds” and shame them, but there is no economic sense in letting black money earn wealth for Dawood Ibrahim (and other crooks) and foreign banks but not for Indians in India. By keeping black money out of legit avenues back home, we are thwarting the creation of more growth and jobs.

Modi and Arun Jaitley have lost a golden opportunity to make black money yield benefits for the country. The politics of black money has trumped its economics.

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Updated Date: Jul 04, 2015 12:25:52 IST