Black money case: It's an economic problem, keep politics out of it
Rooting out black money will be tough for any government. Widening the tax base and lowering the rates will help but there would be political and social risks, writes HT editor-in-chief Sanjoy Narayan.columns Updated: Nov 02, 2014 08:27 IST
Anecdotes about the proliferation of black money in India abound. The middle-aged woman you spot at a south Delhi luxury mall paying for her uber designer purchases with a wad of cash fatter than you could have imagined; or the Mercedes dealer who tells you how when the German luxury car was first launched in India in the mid-1990s, two men drove up to his showroom in a Contessa, produced suitcases of cash from its trunk and demanded that he sell them two Mercs right away.
Then, there are instances that aren't so anecdotal. Like the time you wanted to buy an apartment in your city and quickly learnt that you'd have to pay 50-60% of the price in cash that would not be accounted for; or found out that the way most people buy gold is with cash and don't get a receipt of any sort for the transaction.
While the current obsession with black money is about the accounts in Swiss and other no-questions-asked sort of banks in Europe, the fact is that the money stashed away abroad by Indians is just a sliver of the black money that swirls round within India's boundaries. Black money is income that is not disclosed to the government and, therefore, not assessed for tax, and although there is no official fix on how much of it is there, unofficial estimates say it could be as much as $500 billion or Rs 31 lakh crore (nearly 30% of India's $1.8-trillion GDP).
If that sum was disclosed and taxed at a rate of 30%, it would yield additional revenue of Rs 9 lakh crore. That's enough money to build 180,000 km of national expressways; or, enough money to build 626 state-of-the-art 2,000-bed super speciality hospitals - one for each of India's districts; or, enough money to declare a zero tax year for all individuals and firms and yet enable the government to meet all its expenses; or, enough money to make direct transfers in cash to the poorest 405 million households and lift them out of abject poverty.
For now, such grandiose spending plans will have to remain in our dreams. Black money is not going away any time soon. About half of India's black money transactions are in real estate deals; a fourth in manufacturing activity; and the remaining in deals involving gold, silver and luxury products, including cars. Some of the unaccounted money finds its way into foreign banks; some of it goes out through the underground banking system known as hawala; and some of it round-trips back (via tax havens) into the Indian economy as 'legitimate' investment in the stock-market or even in industry.
Black money, including what tax evaders stash away in foreign banks, is not a political problem. It's an economic one. India's income tax base is tiny. Of the 720 million working population, only 34 million pay income tax; and in agriculture, income is exempt from tax. The incentives and the ability to get people to pay income tax in the unorganised sector are limited; and, for many services, unrecorded cash transactions for are de rigueur. For companies, the tax structure has so many layers that although the corporation tax rate is 30%, once other taxes (such as CST, dividend tax, property tax and VAT) are added, they end up paying more than 60% of profit as tax. That can be a good incentive for companies to evade taxes.
Rooting out black money will be tough for any government. Widening the tax base and lowering the rates will help but there would be political and social risks. Routing all transactions through the banking system can help take cash deals out of the system but in an economy like India's it won't be easy. The real stumbling block could be elsewhere. India's elections are the biggest perpetrators of black money as large amounts of cash from industry fund them. Reforms to have state funding for elections have been debated by governments of every stripe but, for obvious reasons, nothing has happened.