Economic Highlights

New Delhi, 17 April 2009

What Black Money?

CHANGE TAX SYSTEM, MINDSET

By Shivaji Sarkar

Is there anything like black money? May be. In the Indian context how much is such money nobody knows. There are only guesses. About 15 years back it was estimated to be around Rs 40,000 crore. It has now been revised to Rs 75 lakh crore after several voluntary black money disclosure schemes announced by the finance ministry.

In reality, there is nothing like black money. It is “black” only in the eyes of the bureaucracy, who has created convoluted tax laws the world over. Worse, the politician who is supposed to protect the commoner has never tried to understand the phenomenon.

This does not minimize the demands to bring such money from abroad back to Indian shores to pep up the economy. The big question is: How much is stacked in tax havens like Switzerland, Hong Kong and Macau? Again nobody really knows. Hong Kong had thrived as a tax haven during the British rule. Today, Britain is alleged to be fostering many other tax havens. 

Money has no colour. Black or white-- it has the same purchasing capacity and both are legal tenders. It is termed “black” when people avoid paying tax on part of their income. This is so because the taxes, not only in India but even in most developed countries are too high. People, who, it is often alleged, do not labour but eat into others hard-earned money, levy the tax. It has been observed the world-over that higher the rates, higher are the evasions.

Tax havens had a mention even in the G20 London summit. It is an admission that the developed world is as afflicted by the phenomenon as India. Sadly, nobody has tried to look into the reasons. Nevertheless, the answer is coming from the US state of Texas. It is holding on the pattern of revolutionary Boston Tea Party “anti-tax tea parties” – a protest against “monstrous tax code”.

The G20 discussed the issue not out of the blue. The financial situation is grim in many of the developed countries. It is stated that the US itself loses an estimated $ 100 billion through unaccounted funds every year.

The nations need to realize that in their anxiety to mop in more revenue they raise tax rates, often to an oppressive limit. This forces people to look for places where they can keep their money, which in official terms is called “unaccounted.” Besides, there is a fall-out for the beneficiaries like Switzerland. Its economy has thrived and so has of many small island nations. During the British rule in Hong Kong, many rich people from China used to keep their money there. It had lubricated the British economy. Now the culprits are turning accusers as such easy money is eluding the erstwhile empire and is leading to a drain on its own economy. Bad deeds have bad consequences.

The so-called unaccounted wealth is created with the help of financial experts. Chartered accountants often play a significant role. It is created through under-invoicing, over-invoicing of exports and imports and the balance is stored abroad. Kickbacks from many deals, high property prices, smuggling of gold and currency, drugs, arms and similar other operation are stated to be other sources. Some pious operations like religious donations, art sales also find their way to such tax havens.

But for the criminal operations, most other funds, which would have naturally come to the country of one’s origin is siphoned off for only one reason. If the money was repatriated a major part would be gobbled up by respective governments claiming a plethora of taxes and compounded by penalites.

Similar conditions create black money domestically also. Individuals, small entrepreneurs and traders and even corporates do it. Discussing high corporate taxes is a taboo in a country that still suffers from a socialistic mindset. It was the mindset to fleece the corporate following a belief that they are the perpetrators of all wrongdoings.

All these people do not have a big income so that they can lose a huge chunk of money. Many businesses would close down if they make honest balance sheets, some chartered accountants aver. So what is called fudging has become a normal procedure. Complex tax laws and still more complex rules also aid it. These have helped only the tax bureaucracy.  In a country, where less than three per cent pay income tax raising the minimum exemption limit is not the solution. Instead, it needs to lower the tax rates and simplify the tax return norms. Literally income tax needs to be halved.

Rules for repatriation of funds from abroad also need to be simplified. Not so long ago a former minister was accused of his involvement for creating such funds for some deals in Iraq. The rules prevented him from bringing the money. In fact, the law must be made people-friendly. It should not be an oppressive penalizing tool. Stricter laws open up more avenues for siphoning and funneling of funds to other destinations.

There is a flip side to it. It aids the economy of countries that survive on slush money. No policing can stop it. Creation of a conducive atmosphere alone can change it. Laws should be made in a manner that it becomes expensive to stack money abroad. Thus, there is need for overhauling the entire tax system. But more than that it requires a drastic change in the bureaucratic mindset.

Tax evaders, if at all any, need not be equated with criminals. The system should have in-built mechanism to encourage them to pay taxes even beyond the stipulated dates. Penalising the people who help raise revenues for the State is certainly not an ideal solution. Taxing bank deposits and seeking PAN numbers for opening bank accounts also prevent people from keeping money in banks. This needs to be reversed. Such money is not utilized for developmental purposes. 

India and its political leaders should take the lead to change the world’s financial and tax rules. Aping the colonial West has not helped anyone. Let India integrate all the money that is generated by its people into its system. Except criminals nobody would like to keep “black” money.--INFA

(Copyright, India News and Feature Alliance)