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Counting the hidden pennies

india Updated: May 21, 2012 23:11 IST

Hindustan Times
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The quaintness of a White Paper on black money is restricted to its title. The official take on India's unaccounted wealth is a predictable diagnosis of, and prescription for, an ill that has corroded our institutions to a point where governance delivery freezes up. The reason for the existence of a parallel economy is pretty straightforward. The cost of paying taxes in India is higher than the cost of not paying them. Since current Indian tax rates fall within the internationally acceptable band, the taxman's dilemma - brought forth throughout the report - is how to increase deterrence without raising compliance costs inordinately. Technology is bringing down the price of surveillance, but the reforms that will lower entry barriers to business await a wider political consensus. This central question aside - to which it has no definitive answer - the White Paper goes into considerable detail about how the government is trying to build a fence around legitimate economic activity in the country.

There is a plethora of strategies to choke the flow of illicit wealth to areas that tend to draw it most: real estate, gold, stocks and foreign tax havens. The multiple jurisdictions in these sectors makes the taxman's job tougher than it ought to be. The report relies on self-policing taxes like those proposed - and later revoked by finance minister Pranab Mukherjee in his latest budget- on house and jewellery sales. There is a point of diminishing returns in the use of taxes for surveillance unless the generation of black money itself is not curbed. Nudging states towards lower stamp duty on property transactions through a basket of incentives to renew the creaking infrastructure of Indian cities is a drawn-out strategy. Yet it is better than merely imposing another monitoring tax on house transactions that are grossly undervalued, if they are reported at all. The government study admits there is no getting around the fact that transparent competitive markets make the best policemen.

India has joined a global crusade against money evading taxes. The White Paper, along with an independent study to estimate the size of India's black economy, makes a modest beginning. India's policymakers are finally publicly introspecting on the shortages that create black markets in the first place, the regulatory mechanism that pushes resources underground, and the lack of policing that allows the parallel economy unfettered growth. By placing the paper in Parliament, Mr Mukherjee has done his bit to keep the issue of black money alive. It would be cynical to dismiss this White Paper as an admission of the government's intention of not doing much about black money. There are enough actionable points in the study for this and succeeding governments.