Bringing back black money: Why name-and-shame alone won't work in India

The NDA government has received widespread flak – and deservedly - for refusing to name the persons who may have stashed black money abroad after having kicked up such a fuss over it in the last two Lok Sabha elections. In 2009, LK Advani as the BJP’s prime ministerial candidate made it the centrepiece of his campaign – and lost. In 2014, Narendra Modi – backed by the likes of Baba Ramdev – again talked about the Congress party’s unwillingness to name the names it already has on its black list. He won, but not because of his statements on bringing back black money. Black money was not the reason why the electorate voted for him.

Some citizens believe that naming and shaming will be a good deterrent. But I doubt it. Even after being convicted for various crimes, J Jayalalithaa, Lalu Prasad and Om Prakash Chautala have not lost any of their public support. We are not an easily shame-able nation. We are pragmatists. So the best thing to do is not to focus so much on the name-shame routine, but to put in place policies that prevent the generation of black money in the first place, and offer pragmatic amnesty schemes to bring back whatever illegal wealth is stashed away abroad.

Representational image. AFP

Representational image. AFP

The first thing to realise is that 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).

Two years ago, the UPA set up a committee under MC Joshi, a former Chairman of the Central Board of Direct Taxes, to suggest ways to bring back black money. The committee did not have any numbers on the quantum of black money held here or abroad, but suggested that the money stashed abroad should be brought back through a tax-and-forgive policy. It said: “The Central Government may consider bringing a compliance scheme with reduced penalties, and immunity from prosecution, especially to bring back money kept abroad,” reported The Indian Express at that time.

A former CBI Director, AP Singh, pointed out that trying to chase assets abroad was too “complex, time consuming and costly” to be worth doing without “expertise and political will.” Talking of the CBI’s own experience in running after dirty money, he said: “In some of the recent important cases being investigated by the CBI such as 2G, CWG and Madhu Koda, we find that money is taken to Dubai/Singapore/Mauritius from where it goes to Switzerland and other such tax havens. For criminals, all it involves is setting up of a few shell companies and then making layered transfers from one account to another in a matter of hours as there are no boundaries in banking transactions.”

Whatever the government does, the criminals are always two steps ahead of it – especially in a world where money can be moved around at the click of a button. Hence, the more pragmatic option is to focus on policy changes back home and adopting a carrot-and-stick policy to get at least some of the money back.

Let’s also try and understand what black money is, in the first place. As I have noted before, it is not money printed in a different colour. It is essentially money not declared (or under-declared) to our tax authorities – either income tax or customs. The tax havens storing it abroad could not care less about whether the owners paid taxes in India or not. For them it is just money. This means the key to luring the money back will involve some tweaking of our tax regime. It is not just a police and law action.

Secondly, even in a virtual sense, black money changes colour all the time. Tax-evaded money may be black, but some part of it becomes white again as it flows further, even though the original amount may be black. For example, if I pay 10 percent of my house purchase price in cash, the receiver may use it to buy some things at the mall which becomes white if the mall-owner pays tax on his income. If he doesn’t, more black money gets created. So there is a stock of black money, and a flow. The aim of policy should be to shrink the flows and further creation of black money, and also make the old stock of black money available to the legitimate economy for development.

We also need to understand how black money gets generated abroad. There are two major ways – one is through the underinvoicing of exports and/or the overinvoicing of imports. The excess is clandestinely retained in tax havens abroad. And the other is the plain illegal route of sending domestic black money in rupees out through the hawala route, which then nests abroad as dollars. During election-time, in fact, the process reverses, as some politicians bring their dollars back to India as rupees to fight elections.

Once again, this money is not just a stock; it can keep flowing in and out. For example, money stashed abroad comes in through Mauritius as foreign institutional investor (FII) money and participates in domestic markets through a route called P-notes (participatory notes, where the ultimate investor is not identified to the Indian market regulator Sebi). Thus illegal money abroad can make capital gains in Indian stocks and exit as profits without paying tax, increasing the stock of illegal wealth abroad.

In 2011, for example, a Kotak Securities report raised suspicions about the high levels of exports and FII inflows seen in 2010-11 as possible evidence of illegal Indian money coming in. The report noted sharp spikes in engineering exports. It notes: “Our study of exports data of major engineering companies (including automobiles and metals) shows that the increase in their exports does not reconcile with the steep increase in official exports data. In fact, the gap is quite substantial." How substantial: maybe around $28 billion. (Read the full Firstbiz story here).

Given this backdrop, what should the Modi government do to bring black money back and put it to productive use? What is the carrot-and-stick approach that will work best?

The answer is to simultaneously announce two things: an amnesty scheme for black money coming in from abroad (and a separate one for domestic black money), and the creation of a special task force to only look at tax havens, backed up by legal, legislative and political action that promises very strong punishment for those caught holding illegal accounts after a given deadline.

The Modi government could offer zero-interest infrastructure bonds for any foreign funds brought in from abroad with the promise that the owners or their sources of money will not be questioned. The bonds can be listed, and a continuous stock can be made available till, say, 31 December 2015. The gross inflows can be taxed at 10-20 percent at source. For domestic black money, a no-questions-asked bond with 30 percent tax can be offered.

There are moral questions involved here, for it would amount to pardoning people who held illegal wealth abroad and evaded taxes here. But one can be pragmatic or one can be purely moral and achieve nothing beyond the pleasure of shaming someone. The government of India is no stranger to repeated amnesty schemes. P Chidambaram had done a voluntary disclosure scheme in 1997 (in a government where the Left was partner), and more recently there have been several schemes to pardon service tax evaders and others.

So a cash-starved government can and should announce an amnesty scheme for illegal wealth abroad and back home. But it won’t work be worth it without brandishing a stout stick.

The government must thus descend like a ton of bricks on whoever is found holding illegal accounts abroad after a declared date for amnesty. This intent must be made clear right at the outset, and some names already found to have done dark deeds can be made examples of. We already have a ready list of names from Liechtenstein and some illegal HSBC accounts, and more could be made available, if we only tried hard enough. Offenders should be picked at random and made examples of. Marching a few past offenders off to jail under a new detention law for white collar crimes will send shivers down businessmen’s spines.

The strategy should be: get the money back, and then name and shame those who fail to bring it in. Mere name-and-shame means no money will come in ever. It would be a pyrrhic victory against black money.


Updated Date: Oct 18, 2014 13:03 PM

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