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Budget 2012: Black Money- India's Unobtanium

Published on Sat, Mar 10,2012 | 13:42, Updated at Tue, Mar 13 at 15:18Source : CNBC-TV18 |   Watch Video :

Every year before the annual central government Budget exercise, a whisper campaign is unleashed which pushes for or makes the case to some extent for an amnesty or a voluntary disclosure type of scheme to whiten black money.  Although most tax-paying citizens are most likely to detest the very thought of an amnesty scheme but many make the case that it is probably the fastest and a best way to bring those billions of dollars stashed overseas back into the country and back into the tax net. 

Sharing their take on the Black Money saga, R Vaidyanathan, Professor of Finance and Control at the Indian Institute of Management in Bangalore and GC Srivastava, Former Joint Secretary, Foreign Tax and Tax Research at the Central Board of Direct Tax (CBDT) and Raymond Baker, the Director of Global Financial Integrity explain the nuances of what is being called India un-obtainium.

Below is an edited transcript of the discussion on CNBC-TV18's Menaka Doshi. Also watch the accompanying video.

Doshi: Are you in favour of the amnesty scheme?

Vaidyanathan: This government's creditability is extremely low; hence, any type of amnesty being introduced will be looked at with cynicism. I donít think the government will come out with any type of amnesty at this juncture.

Doshi:  As a mechanism to bring back money which is otherwise inaccessible, are you in favour of amnesty schemes at all?

Vaidyanathan: Not at all because amnesty automatically implies that we condone what has taken place. Secondly, even without amnesty the money is coming in through several routes.

Doshi: The Supreme Court (SC) of India is not in favour of an amnesty but do you believe that maybe the easiest and fastest way to be able to tax illicit flows of money that have escaped this country?

Srivastava: No, I donít think that is the right course. Any such scheme erodes the efficacy of the system and the enforcement machinery. The honest taxpayers feel cheated about it once the scheme is on. You are not going to gain anything out of it except garnering some revenues and that too it is highly doubtful but as a long-term measure, one can never advocate for such scheme.

Doshi: The GFI has estimated that between the year 1948 and 2008, India lost USD 213 billion in illicit financial flows, the net present value of which is likely to be approximately USD 462 billion, and that is the amount of money that Indian tax evaders have stashed away abroad. Is it the most effective way to bring this back, an amnesty or a voluntary disclosure type of scheme?

Baker: Amnesty procedures have had a very mixed record. For example, in United States an amnesty several years ago brought back a little over USD 300 billion under provisos that that money be invested in plant and equipment and so forth. It was not invested in plant and equipment. So, the return of that money instead gets spent on executive bonuses and acquisitions of other companies and so forth. It had little positive effect on the US economy. In our thinking the more important question is what steps will be taken to curtail the ongoing outflow of illicit money from India.

Doshi: Last year we have seen countries like the US design and implement several offshore voluntary disclosure schemes that are designed to bring back money into the tax net. Do you think countries continue to persist with this as a short-term fix to very long-term problems?

Baker: United States has gone a great deal passed a voluntary disclosure. The United States has passed a legislation requiring foreign financial institutions to report to the United States, earnings by US depositors on their foreign bank accounts. This is an extremely aggressive procedure and does serve to bring into the United States information that was never available in the past.

Doshi: Is it your case then that amnesty schemes while they provide short-term fixes must be accompanied with other strong enforcement measures because on their own they are not able to achieve much?

Baker: In fact it is proving to be very useful in United States. Furthermore the way in which the United States went after the Swiss Bank UBS has proven to be very effective. There have been a great many voluntary disclosures of overseas accounts following the indictment of UBS. Hence, aggressive measures can have benefits.

Doshi: Have we done enough in the last few years to at least make a beginning?

Vaidyanathan: We require political will. We have a 1.5 trillion guerilla economy. Hence, we should take the lead in a campaign to close down all these tax heavens. These tax heavens are red-light districts of the global financial architecture. We must arm-twist countries like Switzerland and Cayman Island to have geographical disclosure of the depositors, not only of shares and bonds but the pearls, the diamonds, the gold and other type of jewellery which is lying from India in their lockers. We must take punitive action against those countries and those institutions since they has substantial amount of economic interest in India. I think the time has come when India has to act and not just to sign these double taxation treaties only which are prospective in nature.

Doshi: What is it that India can do effectively to bring this money back?

Srivastava: These exchanges of information agreements will give the information in specific cases and then we have to grow hunting all those cases where we found some material to indicate that there is the money abroad. However, to then get a list of account holders or to get some data indicating maybe that indicates as Germany has got some data.

Baker: I agree with putting increasing pressure on tax heavens. I do think that the tax information exchange agreements India has been very aggressive in signing these over the past couple of years and that is helpful but I donít think itís helpful in bringing back the black money.

The international mechanisms for returning assets deposited abroad often by illicit means is very cumbersome. I think the cart is before the horse in this case. The more important goal is to curtail the ongoing outflow, take steps to curtail the outflow and then turn attention towards recovering the money that has been deposited aboard, thatís far more difficult whereas curtailing the ongoing outflow can be accomplished with some straightforward means.

Prime Minister Singh in the G 20 meeting France last year called for automatic exchange of tax information between countries. This already exists in the European Union. India is big enough and powerful enough to make such a request of its major trading partner countries and push for such information exchange. This goes far towards curtailing the ongoing outflow which in my judgment is the first step towards attracting the money that has gone abroad and needs to return.

Doshi: Have we done enough in this country to expand the tax base?

Srivastava: The tax base is still very low. But then question is our mechanism is in place, the law reaches to almost all sectors except agriculture sector of course. It is a question of enforcement. We canít expect the taxman to go to every doorstep. We need to ensure that enforcement machinery. The only way is to create a mechanism where it becomes more and more difficult for the people to really keep these transactions under the carpet.

Doshi: Do you think though that the revenue department whose job is to do so has done enough to expand the tax base to create a paper trail of all transactions and if not what more needs to be done?

Vaidyanathan: We should be very unambiguously categorical that our revenue department is under the ministry and our politicians do have a large stake in this. We had concrete cases like the Bofors, Madhu Koda, CWG and very recently the Kripashankar Singhís case. All of them are on various stages of being investigated. If these cases are taken to its logical conclusion and severe punishment is given then credibility will be restored into the system.

Doshi: What is some of the weaknesses or the flaws that you see in the measures to curb the flow of elicit money outside India?

Baker: One of the things that need to be done with Indian officials is to make tax evasion a criminal offence. The financial action taskforce in Paris which is the international standard setter for anti-money laundering policies, last month produced a recommendation that countries abiding by anti-money laundering standards should make tax evasion an offence under anti-money laundering policies, it has been further suggested that the next step is to make tax evasion a criminal offence. The purpose of this is not to fill up the courts with tax evasion cases. The purpose is to change the normative behavior that exists among many people in tax evasion. Indeed the assistance that is given to tax evasion by lawyers, accountants and bankers and so forth.

Doshi: Do you think that will go anyway in trying to curb this problem?

Srivastava: I fully agree with Mr. Baker. It has to be declared as a predicate offense and a money laundering act and that will go a long way.

Doshi: The department hasnít been able to do so in all these years even though the offense is not one that is criminal.

Srivastava: The misuse of the corporate structure has been really an issue and that needs to be addressed that how corporate structures are being used in and outside the country for laundering of these kinds of money.

Doshi: For a country thatís desperate to be able to raise revenue, donít you think that the politicians despite the prevailing environment might feel the need to bring some of the money back because we desperately need the money?

Vaidyanathan: I am not very confident because maybe if these institutions like Income Tax, Central Excise, Enforcement Directorate, they have all been emaciated by the politicians over a long period of time. The political interference of these institutions must stop. They must become statutory and independent and as Dr. Baker said one of the important things is to bring money laundering a criminal offense.

Doshi: If there is one in the case of an amnesty it is wholly undesirable. So, the only way to do this is hard work?

Baker: What I would like to see is India taking a leadership position among the emerging market countries in the G20 to push for international standards. Prime Minister Singh called for one of these automatic exchanges of tax information and curtailing the activities of tax heavens. These are important steps. India is big, powerful and strong enough to take the lead in calling for these kinds of changes in the international scene.

Doshi: What do we do since we need the money desperately?

Vaidyanathan: India must take the lead in G20 and it must lead all other emerging markets to cleanse the system. The financial action task force has clearly enunciated what are the things that should be done and India should take it up.


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