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Money abroad can be brought to India through government bonds

analysis Updated: Nov 30, 2016 20:33 IST
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FILE - In this Nov. 10, 2016 file photo, discontinued Indian currency notes of 1,000 denomination are seen after they were deposited by people at a bank in Bangalore, India. Indian prime minister Narendra Modi, in his Nov. 8 televised address, announced the demonetization of India’s 500 and 1,000-rupee notes, which made up 86 percent of the country’s currency. There are doubts about whether the demonetization drive will truly make an impact on corruption and tax evasion. India’s underground economy is so big it accounts for up to a quarter of the country’s gross domestic product. And many of those possessing piles of black money have come up with ways to save much of it without drawing government attention. (AP Photo/Aijaz Rahi, File)(AP)

As demonetisation slowly marginalises the parallel economy, there is concern about black money lying abroad. The 90-day compliance window for holders of undeclared foreign assets ended on September 30, with a perception that more could be done to bring that money back. Here’s where we can draw some lessons from the US treasury and their handling of public debt.

The US debt is more than $19 trillion. There are also reports of over $2.4 trillion in earnings of US companies lying un-repatriated abroad. But soaring public debt notwithstanding, the US has chosen to maintain its calm and also defer taxes on the earnings of US companies lying abroad.

Is there a lesson in this for India?

Read: Govt ready for demonetisation debate in Parliament, PM will take part : Naidu

In an article in the New York Times, Paul Krugman explained that America doesn’t worry unduly because although foreigners hold large claims on the US, including government debt, they put their US investments in safe, low-yield assets, and America actually earns more from its assets abroad than it pays to foreign investors.

American assets take the form of foreign subsidiaries of US corporations, which earn a higher rate of return than US liabilities since foreign investments are mostly in low-yield treasury bills or securities. Due to the provisions of deferral, the US taxes its multinationals on profits earned abroad only after these are repatriated. A lesser-known fact is that this untaxed money is largely held in US banks and accounts through the simple provision of allowing this to be invested in US sovereign debt and securities. Witness the latest quarterly report of Microsoft, which reports $102.8 billion in untaxed profits controlled by its offshore subsidiaries, 81% of which is held in US government securities.

Read: Fierce dogs, trapdoors, low manpower: What the taxman faces in black money war

Taking a cue from the US and, making the money offshore work for the Indian economy, are possible if the government permits money lying abroad to be invested in low-cost, long-term, sovereign government debt. How would this work? Fairly simply actually, and would require that those with cash offshore be permitted to purchase zero-return bonds with a minimum lock-in period (say, five years) for funds repatriated from abroad, no questions asked. The upside — we get money back to India, at zero interest, and the taxpayer gets an opportunity to bring back his money without resorting to hawala, tax havens and other avoidance structures and can use it as an asset in the interim to raise loans, etc. To the taxpayer it’s simply the equivalent of buying zero-return bonds with a lock-in of five years and getting his Rs 100 tax-free. The government gets Rs 100, at zero interest, for five years yielding a built-in tax rate that’s much higher than any income declaration scheme so far.

Read: Meat exporter Moin Qureshi returns to India, quizzed by ED

More importantly, the government wants to ease monetary policy and the central bank could only have done this by selling securities on the open market and pulling money out of the private banking sector. This way, the money supply is not reduced, since the investment in debt is coming from overseas, thus providing the government the facility for easing monetary policy and pump priming. To invest in treasury bills currently a special scheme will have to be devised by the RBI requiring the issuance of a Master Circular. These are inward remittances through banking channels, and normal regulatory oversight through reporting by commercial banks to the FIU only need apply. Without wasting any more time, let’s consider bring our offshore money home.

Poonam Khaira Sidhu is a specialist in international taxation .

The views expressed are personal