Who’s Afraid of the Government’s Black Money Law? No One

A thousand rupee note

A thousand rupee note

Some coincidences are not surprising at all. Newspapers have reported that the police on election duty in Bihar had seized $1 million–actual dollar bills— from a van near Madhepura in Bihar on Wednesday. On that very day the finance ministry in Delhi announced the most dismal, indeed embarrassing, response to the new black money law aimed at bringing back illegal wealth from abroad. This much touted law managed to attract a little over $500 million ( Rs.3,770 crores). The BJP, through an internal study, had originally claimed a sum of $500 billion illegally stashed abroad  by Indians!

So what is the connection between $1 million seized by the Bihar police in just one small episode and the near total failure on the part of the Centre to get black money from abroad, inspite of a stringent law which seeks to  sentence the violator up to 10 years imprisonment besides seizing his or assets in India? The hawala-laundered black money from abroad poured into the Bihar elections may well be multiple times more than the illegal income declaration made to the finance ministry under the black money law.  The point is why should Indian businessmen with illegal money abroad declare their ill- gotten wealth when they are funding election after expensive election for political parties? No one really wants to address this fundamental question.

The crucial loophole

This is the crux of the black money debate in India. Both Prime Minister Narendra Modi and Finance Minister Arun Jaitley may do any amount of posturing about their campaign against black money, but the hard reality is that most organized political parties receive over 80% of their big donations in cash, and these are split into small denominations of Rs.20,000 or less, whose donors need not be disclosed as per current guidelines. So a political party may receive Rs.1000 crores in cash from just one businessman, but 80% of that amount can be split into cash contributions of Rs.20,000 each from thousands of unnamed individuals. It is this institutionalized loophole that connects our black money economy to election funding. Interestingly, this cozy arrangement between big business and political parties is properly captured in a 1000-page report given to the finance ministry by the high level committee on unearthing black money created by the NDA government, on the instruction of the Supreme Court, immediately after it came to power.

So is it any surprise that Indian businessmen holding illegal money abroad have chosen to virtually mock the new black money law which tried to wield the big stick against them? Interestingly, the declaration of illegal income amounting to Rs.3,770 cores is a fraction of what was declared under the voluntary disclosure scheme in 1997. That scheme was meant for illegal money kept in India and abroad and under it Rs.26,000 crore of black money was declared. The value of this amount today, in inflation adjusted terms, should easily be higher than Rs. 1 lakh crore. It makes the present scheme, with just Rs.3,770 crores declared, look like an utter failure.

Some argue the present scheme cannot be compared with the voluntary disclosure scheme of 1997 in which you could pay 30% tax and go scot free. Under the present scheme there is a penalty of 100%, bringing the tax rate up to 60%, in the event of declaration. However, there is enough incentive to pay 60% tax and buy peace, especially considering that there is stringent punishment of 10 years imprisonment and seizure of local assets in the event the offenders get caught later. This was meant to send a scare among businessmen holding illegal money abroad. But it doesn’t seem to have worked at all.

Embarrassing response

In a way, the embarrassing response to the new black money law makes a mockery of our governance framework in which the offenders seem to think they can forever game the system, whatever the laws. This attitude is visible in the way someone like Lalit Modi, accused of laundering IPL money, so openly mocks the Enforcement Directorate and its top bosses, including the finance minister.

Another reason why businessmen who have illegal money abroad need not pay 60% tax to bring back their money under the one-time window offered by the NDA is they can easily bring the same money back through the stock market route and pay no tax at all. Tax havens like Mauritius, Malta, Bahamas and the Cayman islands still operate in non-transparent ways though the G-20 is bringing a new regime to share information on real time transfer of money between countries and tax havens. That is a few years away. Until then, ample covert opportunities are available for bringing illegal wealth into the mainstream banking system.

Are NDA’s efforts at curbing domestic black money generation working? It seems the government is still tinkering at the edges. There is no real will to take domestic black money head on. Admittedly, it is a huge task because the black economy is estimated at about $1 trillion, about 50% of India’s current GDP. The finance minister has brought some new rules such as making it mandatory to pay by cheque for real estate transactions. But the bulk of India, outside of tier 1 cities, still pays largely by cash for real estate. Goods and Services Tax (GST) was seen as another device to rein in black money generating businesses like real estate and liquor. But the state governments do not want liquor business to be brought under GST. Politicians were even resisting bringing real estate under GST. Prime Minister Narendra Modi will have to do a lot more than lip service to attack the black economy. He can start with cleaning the election funding system.



    I cannot agree more with the views expressed
    in this article. The amount black or unaccounted money which has been declared
    is not even a fraction of that exists. Obviously, those who are having
    unaccounted money are not worried about government action as they know that it
    is simply incapable of compelling these individuals to disclose their
    unaccounted wealth. (2) If the government wants to curb generation of
    unaccounted money, it has to demonstrate required political and administrative
    will to go to the route of the problem, which is corruption at various
    political levels and in all levels of bureaucracy and more particularly in
    lower and middle levels of bureaucracy. Dealing with corruption is therefore a
    job not only of Central government but also of State governments. (3) Leaders
    of political parties too have to be seriously involved in implementation of
    every programme which aims to curb generation of unaccounted money. It is an
    open secret in all elections (even Gram Panchayat elections these days)
    unaccounted money is widely used, and except perhaps a very few candidates, everyone
    uses unaccounted money to fund election expenses. Hence, without cooperation of
    political parties, it will be just not possible to deal with basic cause of
    generation of black money. (4) Rules
    about audit of election expenses as also of accounts of political parties exist
    only on paper, and no one submits true statement of election expenses. In such
    a scenario, it is obvious that generation of unaccounted money will happen as a
    matter of routine since there is no one to bell the cat as proverb goes.