Dear Modi sarkar, why stop at foreign, what about domestic black money?

No government in India can really go after illegitimate assets at home as they finance political parties, and in the process, elections.

 |  6-minute read |   13-05-2015
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The Lok Sabha passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015 or the Foreign Black Money Bill, on May 11. The finance ministry's 2012 white paper on black money defines black money as "any income on which the taxes imposed by government or public authorities have not been paid". The wealth that has been accumulated in this way "may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and corruption," the white paper goes on to suggest.

Of course this wealth that has been accumulated through tax evasion has "neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession".

Some portion of this black money over the years has managed to escape the Indian shores and has been invested abroad. An estimate made by Washington-based research and advocacy group Global Financial Integrity in a report titled "Illicit Financial Flows from Developing Countries: 2003-2012" suggests that around $439.6 billion of black money left the Indian shores, between 2003 and 2012. Through the Foreign Black Money Bill the government is attempting to get this money back.

Also, given the penal provisions of the Bill, an attempt is being made to ensure that in the days to come, citizens pay tax on their income, instead of accumulating it as black money and then transferring it abroad.

As finance minister Arun Jaitley put it yesterday: "All those who keep money outside - time is running out for them as the world is moving to an automatic information exchange and soon, when that is available, they will be penalised for their action".

And what are these penalties like? The Bill states that undisclosed foreign income as well as assets will be taxed at the rate of 30 per cent, without allowing for exemptions or deductions permissible under the Income Tax Act, 1961. This will be accompanied by a penalty equal to three times the amount of tax. Hence, the tax and penalty on undisclosed overseas income as well as assets can amount to as much as 120 per cent (30 per cent plus 90 per cent). Further, the amount of tax to be paid on foreign assets will be computed on the basis of their current market price and not the price at which they were bought.

Nevertheless, there is a way out of this. After the Bill becomes an Act, the government will offer a short compliance window, which will allow those with undisclosed foreign assets and income to declare them, pay a tax of 30 per cent and a penalty of 30 per cent. The Bill also has a provision that allows the government to charge a penalty of ten lakh rupees for the inaccurate disclosure of foreign assets, along with a rigorous imprisonment of six months to seven years, the first time around. Second and subsequent offences are punishable with a fine of Rs 25 lakh to one crore rupees and rigorous imprisonment of three to ten years.

On the face of it, the Bill seems like an honest attempt to crackdown on the black money that has already left the country and that might leave the country in the days to come. But there are several questions that crop up here.

Why is a short compliance window being offered? It makes the taxpayers who have been honestly declaring their foreign income as well as assets till date, look a tad stupid. Just because someone is willing to pay a fine of 30 per cent and declare his foreign assets, does that make his less guilty? Or is this another tax amnesty scheme in disguise being offered by the government?

Further, why is there a distinction being made between domestic and foreign black money? The definition of black money in the ministry of finance white paper does not make any distinction between black money in the country and black money that has left the shores. Ultimately, almost all black money originates in the country, when people earn an income and do not pay a tax on it. So why is this artificial distinction being made? Why couldn't the government have come up with a law which covered both domestic as well as foreign black money? It's now been in office for close to one year.

The answer perhaps lies in the way political funding works in this country. An analysis carried out by the National Election Watch and Association of Democratic Reforms (ADR) reveals that during the period 2004-05 and 2011-12, the total income of the national political parties was Rs 4,899.46 crore. The Congress party declared the highest income of Rs 2,365.02 crore. It was followed by the Bhartiya Janata Party (BJP), which declared an income of Rs 1,304.22 crore. Between the financial years 2004-05 and 2011-12, there were two Lok Sabha elections (in 2004 and 2009) and multiple state Assembly elections.

It doesn't take rocket science to come to the conclusion that the amount in donations declared by the political parties was clearly not enough for fighting so many elections. Within 90 days of of the completion of General Elections, political parties are required to submit their election expenditure to the Election Commission of India. The National Election Watch and ADR have analysed this expenditure for the last Lok Sabha election and it makes for a very interesting read. This expenditure statement contains the "details of the total amount received as funds in the form of cash, cheques and demand drafts and the total amount spent under various heads". The total amount of funds collected by national political parties for the 2014 Lok Sabha election was pegged at Rs 1158.59 crore. This was 35.5 per cent higher than the funds collected for the 2009 Lok Sabha elections. The total declared expenditure of the national political parties was Rs 1308.75 crore, up by 49.4 per cent from 2009.

Now compare this to an estimate made by the Centre for Media Studies in March 2014. It estimated that around Rs 30,000 crore would be spent during the 16th Lok Sabha elections, which were held in April and May 2014. Of this amount, the government would spend around seven to eight thousand crore rupees to conduct the elections. The remaining amount, of around Rs 22,000-23,000 crore, would be spent by the candidates fighting the elections.

Of course, national political parties are not the only ones fighting elections. Nevertheless, the difference between the officially declared expenditure and the "real" expenditure to fight elections, is huge. Where does this money come from? The domestic black money essentially finances political parties and in the process elections in India. And given this, no government (and political party) can really go after it. Meanwhile, they will keep talking about foreign black money.

Moral of the story - You don't kill the goose that lays golden eggs.

Writer

Vivek Kaul Vivek Kaul @kaul_vivek

Author of the Easy Money trilogy.

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