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INTRODUCTION TO BLACK MONEY

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ARTICLE FROM MAGAZINE:

·        Following is the article dated 7th February 2009 from the magazine India News  Today on---

Forthcoming budget and the Problem of Black Money-I by C.J.. Vinod Anand

AS WE know there are two perspectives of any budget: short-run, and long run. While the short-run perspectives focus on

(a) Income (revenue receipts plus non-debt capital receipts) and expenditure (total expenditure including loans, net of repayment) accounts and the related marginal issues, and on,

 (b) Issues relating to the on-going reforms process, the long-run perspectives indicate the direction of the government economic policy as a whole.

One may suggest a number of issues that have to be incorporated in a given budget, but I would prefer to focus on the issue of black money that is quite often raised in the earlier budgets and that has created quite an excited interest among a large group of people in the country.

At one time there was a proposal to levy a tax at 0.1 per cent on cash withdrawals of over Rs. 10,000 a day from organised banking sector. This was not a revenue mobilising measure but it did show the awareness of the government to an ever growing parallel economy, and its destabilising effects on the organised economy. The basic purpose of this proposal was to trail, track and trap black money. But why do we require trailing black money, when we know how and why it is created. There is good amount of literature to support the hypothesis that black money has very strong linkages with what we term as corruption, and also with the misuse of power.

As a prelude to this hypothesis, we have to remind ourselves that in a modern mixed capitalist system the basic framework has to do with how the economy performs with a wide range of instruments at its disposal (like taxation, public spending, state participation in production, direct controls, regulations, legislation, monetary and debt policy). The functions of the State are very much affected by the kind of ground rules under which the private economy operates. In turn, all of us are constantly affected by the economic and other decisions of the government. In its wider connotation, government or State has three important and mutually dependent components: voters, legislators and administrators (or bureaucrats). They have strong relationships with one another.

Voters express their preferences with relation to public decisions, which may or may not be honoured by the legislators who take eventual decisions. The decisions are implemented by the administrators who may or may not be effective. The role of information and of interest groups is crucial to these inter-linkages. The functioning of the economy, and the roles of individuals in their capacity as voters, legislators, and administrators get distorted, amongst other things, by corrupt and immoral practices called ‘rent-seeking’ and ‘directly unproductive profit seeking’ activities in the

terminology of the ‘new political economy’ implying, apart from other things, dishonest and improper use of one’s power or position for purposes of making illegal money or enhancing one’s power and influence.

·        Following is the article dated 9th February 2009 from the magazine India News Today on--

budget and the Problem of Black Money-III by C.J.. Vinod Anand

There is one positive side of black money that has come into focus in the present times when the country has been infected with the world-wide recession and meltdown that has emerged essentially from the US. But it is expected that India will soon emerge out of this turmoil because of its strengths like low foreign trade dependence, tremendous manpower, a growing middle class, a robust corporate sector and public-private collaboration.

There is also another aspect of the Indian economy which, though negative in all its connotations, is playing a positive role at the present times to take the economy out of this recessionary situation. This is linked with the tremendous amount of black and unaccounted money that is held by the various ‘higher strata’ of the economy.

It is estimated that by the end of June 2008 India had about $50 billion dollars of black money. This means two trillion rupees. It must have gone up by now. This is immensely helping the dipping liquidity to come up, and, thereby, restricting the expanding recession in the country. This is an example to show that ‘bad is not always bad, it also turns out to be good on certain occasions.’

The way-out:

Corruption and its fallouts (including black money, parallel economy and what not) can be reduced only when an adequate anti-corruption strategy is made effective through strong political and bureaucratic will. And for this the root causes of corruption have first to be diagnosed, and then eliminated or minimised. The root causes of bureaucratic corruption in the case of India and a few other Asian countries (Indonesia and Hong Kong) basically originate from opportunities geared by the involvement of civil servants in the administration control, and final disposal of lucrative activities, disproportionate salaries and weak and ineffective policing in terms of detection and the consequent punishments. Apart from these causes the politician-criminal-bureaucrat nexus existing merely for individual gain and survival, and for expanding their tentacles all over and showing no sincerity and reverence towards values, is also a crucial debilitating factor.

Apart from learning from the experience of other countries (like Singapore, the least corrupt country in Asia), in terms of changing the public perception of corruption as ‘a low-risk, high-reward’ activity to ‘a high-risk, low-reward’ activity, and also basing the comprehensive anti-corruption strategy on the ‘logic of corruption control’ in terms of focusing on the removal or minimization of incentives and opportunities that make individual corrupt behaviour irresistible, India has just to make strong determination to combat corruption, given the various legislations and its legal structure.

The only thing, which has to be ensured, is proper, impartial, and unbiased use of the various anti-corruption acts to take strong, deterrent prompt, and timely legal action against the offenders, irrespective of their political/bureaucratic connections, and money or muscle power. Beyond that, there is a widespread perception, and it is also widely seen in everyday life, that India is increasingly becoming a soft state in terms of postponing or ignoring, diplomatically, the use or application of the given legal sanctions or discretions, if any, in crucial matters.

INTERVIEW:

Following is the interview of K Vasanth M. Pai (retd.) Chief Commissioner of Income-Tax on---



 Black money in india: an analysis of its menace and growth

K Vasanth M Pai (retd.) Chief Commissioner of Income-Tax, Mumbai, originally hails from Mangalore. He was born to Kulyadi Panduranga Pai and Leela Pai on 26 Nov, 1941 at Mulky, in D.K District. He completed his M.Com, IRS. Presently, he is leading a retired life with his wife Mrs Gayathri Pai at Kadri Road, Mangalore. The couple has two sons K. Radhakrishna Pai and K. Prashanth Pai. Both of them are working in the SAP field in USA. Pai retired from active service in Nov. 2001.

One of the highpoints of his distinguished career as Chief IT Commissioner, Mumbai was the manner in which his team carried out a thorough probe on the assessment of tax liabilities of the accused in the Securities Scam of 1992, including those of the Harshad Mehta group. The result of the said famous case is now history. Pai has presently put forth some extra-ordinary proposals in his document titled Black Money in India: An analysis of its menace and growth, to counter the menace of black money in the Indian economy. The suggestions made by Pai assume greater significance in the light of the current scenario of the funding of terrorist activities in the country and abroad.

M.com: Mr Pai, why are you so keen on having Indian money deposited in Swiss Banks, being thoroughly investigated?

Mr. Pai: According to a Swiss Bank Report of 2006, Indians hold money deposits over there to the tune of a staggering $1,456 billion or $ 1.4 trillion. This amount is much larger than even the total value of deposits held in Swiss accounts by other countries such as USSR, China, UK and Ukraine. These are undoubtedly monies of questionable origin, on which obviously Income-tax has not been paid in India, which the public here are by and large unaware of.

Let me inform you that this amount is about 13 times larger than our country’s foreign debt. Once these huge deposit comes back to India, our entire foreign debt can be repaid in 24 hours. In fact, after paying off the foreign debt, we will still have a surplus sum 12 times larger than the foreign debt. Moreover, if this surplus money is invested in earning interest, the entire amount of interest will be more than the annual budget of the Central Government. To give you a clearer idea, let me inform you that the Income-tax collections of the Central Government under the Annual Budgets 07-08 was Rs. 3,04,445 Crores.

As of today there is a huge pile of Indian black money lying in Swiss Bank Accounts and I personally consider this money one of the largest loots witnessed by the mankind in the entire economic history of the world since 1947. Hence my painstaking endeavor to have these monies in Swiss Banks being thoroughly investigated and action taken forthwith without any delay.

M.com: What makes you confident that the Swiss Authorities would be willing to divulge to the Indian Govt., details of all such obviously furtive accounts of Indians?

Mr. Pai: Recently due to immense international pressure after 9/11 terrorist attacks on the twin towers in US; the Swiss Government has agreed to furnish information on individual accounts in the Swiss Banks such as names of Account holders etc. This is only if the concerned governments formally ask for it. Unfortunately, our Govt. has till date not asked for any such details from its Swiss counterpart.

This task requires immediate action on part of the Govt. of India, considering the huge deposits lying there. Hence, one more significant part of my endeavor is to ensure that our Govt. acts swiftly on the matter. One other important development has come to the notice of reporters around the world, and that is about 80,000 Indians visit Switzerland every year, of which 25,000 are regular visitors to that country. This aspect too needs to be noted and thoroughly investigated.

M.com: Can you give us an idea on the extent of tax evasion in India?

Mr. Pai: According to a study made by Mumbai Income Tax charge, on the basis of results of earlier surveys and search cases, none of the taxpayers concerned declared for taxation  purposes anything more than 25% of their true incomes, after 1999. This is indeed shocking. The figure arrived at was given to the press specifying the basis on which it was arrived at. Significantly not a single protest was received from any of the taxpayers, including companies.

In fact, there is every reason to believe that there is higher degree of tax evasion in the case of companies, which often resort to camouflaging their capital investments and showing it in their books as if it is explained capital for income tax purposes. The recent IT Company Satyam scam is clearly a case in point. These kinds of tax evasion devices in the accounts and such devious methods needs to be properly investigated by the Income Tax Department. Some of the companies have shown their entire capital as having come from the countries regarded as Tax Havens such as Switzerland and others.

M.com: I understand you have offered some path-breaking proposals to tighten the noose on those who stealthily siphon off money and deposit it in foreign accounts. Can you enlighten us?

You are right; I have made these proposals in my comprehensive document on the generation of black money in the Indian economy and the I-T departments role in checking it. My suggestions made therein are of immense significance for the Indian Economy. This document I sent last week both to the office of the Prime Minister (PMO) and the Central Board of Direct Taxes (CBDT) Chairman NB Singh. I am happy to learn that CBDT, the apex body for tax matters in India, is actively considering my proposal that will allow the income-tax department to ask for information on accounts held by taxpayers in banks abroad.

My simple but most effective solution is to add a new column in I-T returns form, to seek this information. My other proposal calls for a change in regulations that will enable the I-T department to reopen the assessment beyond six years as stipulated now, in case the taxpayer is found having undisclosed accounts abroad. Omission of information or furnishing wrong information will invite penalties.

M.com: What are some of the major solutions you can offer to counter tax evasion by Indians?

Mr. Pai: Undoubtedly, I would say computerization of the entire IT Dept. and modeling it on the lines of those in the U.S. I have suggested some evolutionary measures to be undertaken in this regard in my document. The first step to be taken for evolution of computer system, as in USA, is the number to be allotted to every tax payer in India. In U.S., a Social Security Number is provided for identification of every taxpayer.

Here we have the Permanent Account Number (PAN No.) for the taxpayers. But I think the system of allotment of PAN Numbers is defective and it is to be considered whether the system should continue after making certain modifications and eliminating of errors within. In India there is a huge problem of people not filing their IT returns. With computerization it will be possible to detect such cases. However, the system of identification of the new taxpayers should be scrupulously implemented and applied for use by the IT department.

Since one of the peculiar features of the Indian economy, is the fondness of certain segment of tax payers to indulge in black money and engage in cash system of payment, there is an urgent need to regulate the same and ensure that almost all payments are carried out through cheques and bank accounts only. Our parliament needs to lay down strict guidelines and legislation for this purpose, and the implementation of the legislation should be effective and thorough Thus by bringing together all funds of the economy under the banking system, the total success of the computerization of the IT Dept will be definately assured.

I also proposed that adequate provision be made in the Union Budget for expenses pertaining to adoption of computerization of the entire Income Tax Dept. It should be noted that when in 1963 computers were first introduced in U.S. Income tax dept., along with that stiff penalties and punishment of 5 years imprisonment was imposed on taxpayers failing to account for any item of income as detected by the computers. Our government too must consider similar provisions and incorporate it into our tax laws. In view of all these advantages I suggest that the computer system of the U.S. be studied in detail and plans be drawn up for implementation of the same in India.

M.com: What would you like to say in conclusion?

Mr. Pai: Well, I would like to quote Prof. B.R. Shenoy, one of the leading economists of the country who very aptly remarked way back in 1962 that 'The black market sector of the Indian Economy today, is well past the take off stage of development. The phenomenon is revolting to the national conscience. But there is no remedy to it other than to strike at its roots  by an abandonment of the policies of Statism.'

The source of black incomes in India is now well known, as evasion of tax on normal income and incomes from crime or corruption. It is now time for active citizenship. In other words, its now the turn of the ordinary citizens to demand action from parliament, judiciary, executive and civil society. All of us must demand swift action from our administrators which in turn will help in checking this menace of black money to a large extent.

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