As promised, the finance minister's White Paper on Black Money is out. But don't hold your breath. There are no disclosures here to make you spill that cup of coffee you may be holding in your hands. Or rush out of the bath shouting Eureka!
What the White Paper does is give you a backgrounder on the various dimensions of black money - both the stuff generated here and the moolah stashed abroad - and why it is difficult to come up with a precise estimate of how much of it have evaded the taxman.
The most interesting figure it gives us is the officially disclosed figure of Indian accounts held with Swiss banks. It is down 60 percent between 2006 and 2010. Conclusion: black money is being moved around; it is one step ahead of the taxman.
In fact, net of illegal inflows back into India, the black money held abroad may be less than $213 billion, the White Paper seems to suggest in a roundabout way.
The closest it comes to giving us a figure on the illegal wealth abroad is when it discusses the estimates made by the International Monetary Fund (IMF) and Global Financial Integrity (GFI), a non-government organisation that campaigns against illicit global financial flows.
While the IMF study estimated the flight of capital from India during 1971-97 at $ 88 billion, GFI, in its 2010 report, put the total illicit outflows from India at $213.2 billion. This sum, after adjustment for the possible returns earned on these funds (the money is not kept under a mattress), would amount to $462 billion.
The finance ministry's White Paper pooh-poohs the GFI claim by saying that the estimates are probably too high since they do not take into account "illicit inflows" - the black money that comes back in to earn returns.
Says the paper: "By not considering illicit inflows, even if the reasons given are valid, it is apparent that the estimate given in GFI's November 2010 report of a total of US$213.2 billion being shifted out of India from 1948 to 2008 appears to be on the higher side."
On the other hand, the paper makes the suggestion that some of the black money may be coming back to earn higher returns in India. It says: "It needs to be ascertained whether such an amount is stashed abroad in offshore bank accounts or whether this money has at least partly already returned to India."
Firstpost has, in the past, made the conjecture that a lot of the sudden surge in exports during 2010-11 and FII investments maybe illicit money returning to India (Read here). The White paper leads us in the same direction.
The paper points to the huge volumes of investments being routed through Mauritius and Singapore, which accounted for $54 billion (42 percent of total) and $12 billion (9.17 percent) of cumulative inflows between 2000-01 and 2010-11. "Mauritius and Singapore, with their small economies, cannot be the sources of such huge investments and it is apparent that the investments are routed through these jurisdictions for avoidance of taxes and/or for concealing the identities from the revenue authorities of the ultimate investors, many of whom could actually be Indian residents, who have invested in their own companies, though a process known as round tripping."
There's more debunking of the idea that there are oodles of illegal cash health abroad.
In the public imagination, black money equals Swiss Bank accounts. But the White Paper makes a pointed reference to the fact that estimates of Indian holdings in Swiss accounts may be grossly exaggerated. It makes a pointed reference to a Swiss National Bank statement at end-2010 that the total liabilities of Swiss banks to Indians was just $1.945 billion - less than Rs 10,000 crore.
Says the White Paper: "The Swiss ministry of external affairs confirmed these figures when a reference was made by the Indian ministry of external affairs to them." According to the paper's figures, which were taken from the website of the Swiss National Bank, the "bank deposits of Indians in Swiss banks have decreased from Rs 23,373 crore in the year 2006 to Rs 9,295 crore in the year 2010."
Clearly, this proves at least one thing. All the ruckus about black money in India has alerted Swiss account holders that it may be unsafe to stay on. They would have moved their assets to other tax havens. The 60 percent drop in Swiss bank accounts between 2006 and 2010 is one indicator.
Even in the case of the overall estimates of black money generated in the economy, the White Paper uses a World Bank report of 2007 to show that the problem may be less serious in India. The World Bank report said that the weighted average size of the "shadow economy" as a percentage of the official GDP in 162 countries was 31 percent, while for India the figure was 20.7 percent, from from 23.2 percent in 1999. This, notes the paper, compares "favourably with the world average."
So what does one gain from the White Paper? A better knowledge of all known methods of generating black money and what is being proposed to close the loopholes. Here are the highlights:
• There are nothing less than two dozen methods of making black money, ranging from maintaining parallel books of accounts to manipulation of sales and expenses, doing cash transactions in real estate and bullion, underinvoicing and overinvoicing external trade and through transfer pricing arrangements, among other things.
• The White Paper lists GAAR (the General Anti Avoidance Rules, that have caused such heartburn for the markets), various Double Tax Avoidance Treaties, the Lokpal Bill, the Judicial Standards and Accountability Bill, the Whistleblowers Bill and the Public Procurement Bill, among several others, as crucial pieces of legislation that will deter the creation of black money.
• In the area of prevention and deterrence of tax evasion and black money generation, the White Paper mentions the need for reasonable tax rates, economic reforms, reforms in high black money sectors like gold and real estate, and improving tax administration to tackle the menace.
One cannot escape the feeling that the White Paper seeks to undercut the hysteria that has greeted the issue of black money and illegal wealth stored abroad.
Net-net: the White Paper is a damp squib. It has told us nothing we didn't already know, beyond discussing the validity, or otherwise, of the estimates of black wealth stashed abroad.
It is not going to serve the government's political purpose of showing a resolve to tackle black money and corruption. It has been an academic exercise.
(Read the full report below)
Updated Date: Dec 20, 2014 10:17 AM