Of Jaitley, Black Money And Much Ado About Nothing

Vivek Kaul

Oct 07, 2015, 11:30 AM | Updated Feb 11, 2016, 09:00 AM IST

After all the hoopla around black money stashed abroad, Arun Jaitley seems to have discovered that the bulk of it is within India itself. 

In May earlier this year, the Parliament passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Act. After the passage of this Act, also known and referred to as the Black Money Act, the government offered a compliance window.

This window allowed those with undisclosed foreign assets and income to declare them, pay a tax of 30% and a penalty of 30%. The window was closed on September 30, 2015.

Taking advantage of the compliance window, 638 declarants declared assets and income of Rs 4,147 crore in total. This meant that the government will be able to collect around Rs 2,488 crore (60% of Rs 4,147 crore) as tax revenues. This means around Rs 3.9 crore of tax and penalty will be collected on an average from every declarant.

For all the hype and hoopla that has happened around black money in the last one year, this is barely peanuts. The tax and the penalty need to be paid to the government by December 31, 2015.

The annual report of the ministry of finance for 2014-15 has some interesting data points that need to be mentioned here. The total number of assesses in 2013-2014 had stood at 4.7 crores. These include individuals, families, trusts and corporates. What this clearly tells us is that not many Indians pay income tax. Hence, as a result, every year a significant amount of black money on which tax is not paid is generated.

And given this, a collection of Rs 2,488 crore is basically a bad joke especially once you take into account the tremendous amount of political capital that the Narendra Modi government are spending on the black money issue.

Having said that, this should hardly come as a surprise to the government given that the black money recovery skills of the Income Tax department are nothing to write home about. As the Ministry of Finance annual report points out:

“The Income Tax Offices throughout the country continued their drive against tax evaders. During the financial year 2014-15 (up to 30.11.2014), 2068 (provisional) search warrants were executed leading to the seizure of assets worth Rs 538.23 Crore (provisional). During the financial year (up to 30.11.2014), 1174 surveys (provisional) were conducted which yielded a disclosure of undisclosed income of Rs 4673.11 crore (provisional).”

So, once Rs 2,488 crore is looked at from the point of the numbers mentioned in the above paragraph, it does not look so dreadful. The basic point here is that the black money recovery skill of the Income Tax department has been very poor.

There could be several reasons for this. Corruption. Incompetence. Not enough people. Or simply the fact that the crooks are always one step ahead of those who are supposed to catch them.

Long story short—people who have a large amount of black money know fully well the competence level of the Income Tax Department and their ability to recover black money from those who have it.

Once we take this factor into account, finance minister Arun Jaitley’s comment that those who declared their black money to the government could “sleep well,” can be categorised as an empty rhetoric and nothing more.

In fact, after the flop-show, Jaitley seems to have discovered that the bulk of the black money is within India. “The bulk of black money is still within India,” he wrote on his Facebook page. I have been saying this on various media platforms over the last few months.

A lot of this domestic black money has made its way into real estate over the years. As a report on black money brought out by the business lobby FICCI in February 2015 points out: “The Real Estate sector in India constitutes for about 11 % of the GDP of Indian Economy, as these transactions involve high transaction value. In the year 2012-13, Real Estate sector has been considered as the highest parking space for the black money.”

What has this government (or any other for that matter) done to target the black money that has made its way into the real estate sector? Absolutely nothing. In fact, the surprising thing is that sector continues to operate more or less without any regulator despite constituting 11% of the Indian GDP.

A simple explanation for this is the fact that bulk of the ill-gotten wealth of politicians is in the real estate sector and no government wants to disturb the status-quo.

A recent report in The Economic Times points out that: “Doctors, engineers and former senior managers who used to work overseas — these professionals formed the biggest chunk of those who made use of the 90-day grace period for the declaration of unaccounted wealth.” Politicians did not come out of the closet to declare their black money. And politicians, as I pointed out earlier, have their black-money in real estate.

Black money has also made its way into the stock market through the anonymous p-note route. P-notes are derivative instruments issued by Foreign Institutional Investors (FIIs) to investors to invest in the stock market as well as the debt market without registering with the regulator i.e. the Securities and Exchange Board of India.

What this means is that FIIs issue p-notes to investors whose identities are not known to the Indian regulator. Now compare this to the KYC that any Indian has to carry out in order to invest in a mutual fund, open a bank account or get a credit card. The world is definitely not a fair place.

The investments coming into India through the p-note route were at Rs 2.72 lakh crore as on February 2015. A major portion of this money came in through Cayman Islands, Mauritius and Bermuda. As a recent report in Business Today magazine points out: “Cayman Island with a population of less than 55,000 routed investment worth Rs 85,000 crore.”

Hence, p-notes are possibly being used to re-route black money generated in India into the Indian stock as well as debt market.

The last time government tried banning p-notes in 2007, the decision did not go down well with the FIIs. The government had to withdraw the ban. Having said that, as the Business Today report points out: “since 2007, the market regulator tightened the noose, and their share in FII investments came down from 50 per cent in 2007 to 11 per cent in February 2015.”

Nevertheless, even 11% is a big number. The question is will the government ban p-notes? The answer is no. The stock markets are anyway edgy these days and the government needs to raise Rs 69,500 crore during the course of this year. And for that it needs a strong stock market.

Over and above this, there are operators running “black ka white” schemes as well, points out columnist Debashis Basu in a recent column in the Business Standard. Basu writes that not much has been done on this front either.

To conclude, people in decision-making positions know what the problem is. They also know what the solutions are. They choose to talk a lot about it, without doing much about it.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Vivek Kaul is the author of the 'Easy Money' trilogy. He tweets @kaul_vivek

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