BLACK MONEY MENACE IN INDIA

Summary

Black Money Menace in India: Time for Action reproduces a 19 November 2008 Mangalore address by K. V. M. Pai, a former Chief Commissioner of Income Tax, delivered under the joint auspices of the Indian Liberal Group, the Mangalore branch of the Forum of Free Enterprise, and the Economics Research Centre. The booklet opens with a Forum preface that situates Pai’s argument inside a long Forum tradition of writing on tax evasion — citing earlier booklets by B. R. Shenoy, B. P. Adarkar, Vadilal Dagli, D. R. Pendse and H. P. Ranina, and a 1999 contribution by N. Vittal — and an editorial note that flags Pai’s most dramatic claim: that India tops the Swiss Bank Report’s table of foreign deposits.

Pai’s address moves from diagnosis to remedy. He marshals the Swiss Bank Report 2006 to argue that India holds $1,456 billion — more than Russia, the UK, Ukraine and China combined — and contends that repatriation alone could clear India’s foreign debt many times over. He surveys the domestic terrain of evasion: real estate (where lower tax rates have cut, but not eliminated, the black portion of transactions), unaccounted gold and jewellery, benami investments, undisclosed stock-in-trade, share-market transactions, and Swiss and Dubai bank accounts uncovered in the Harshad Mehta searches. He chronicles successive disclosure schemes from 1965 to 1997 as low-yield expedients struck down by the Supreme Court, and reports Income Tax Department estimates that as much as 35% of personal and 43% of corporate tax collections in Mumbai go unpaid.

The prescription is institutional. Drawing on the US Internal Revenue Service’s Social Security Number-based computer system introduced by Commissioner Mortimer Caplin in 1963 — and noting comparable systems in Canada, the UK, Germany, Australia, Japan, Malaysia and Singapore — Pai urges that India’s PAN be made the foundation of a comprehensive national computer system that captures bank, real-estate registration, share, post-office and corporate data, backed by stiff penalties, enlarged reopening windows for Swiss-account cases, adequate budget for the Income Tax Department, and parliamentary legislation. He frames the project against the Fiscal Responsibility and Budget Management Act of 2003 and the Central Government’s persistent revenue deficits, closes with a 1962 warning from B. R. Shenoy that the only real remedy is to abandon the policies of statism, and calls for active citizenship demanding action from Parliament, judiciary, executive and civil society.

Key points

• Pai is a former Chief Commissioner of Income Tax, Mumbai; the text reproduces his 19 November 2008 Mangalore talk under the auspices of the Indian Liberal Group, Forum of Free Enterprise Mangalore, and the Economics Research Centre.

• He uses the Swiss Bank Report 2006 to claim Indian deposits of $1,456 billion — more than Russia ($470bn), the UK ($390bn), Ukraine ($100bn) and China ($96bn) combined — and argues repatriation could clear India’s foreign debt in 24 hours.

• He catalogues the domestic vehicles of black money: real estate (80% of transactions in cash even after rate cuts), gold and jewellery (Rs. 80,000 crore of annual purchases largely outside bank channels), benami investments, undisclosed stock-in-trade, and share-market activity not cross-checked by the Income Tax Department against Mumbai Stock Exchange data.

• Successive disclosure schemes from 1965 to 1997 produced negligible yields; the Supreme Court struck down further disclosure schemes and asked the government to concentrate on detection through investigation and search.

• Income Tax Department studies of cases searched in Mumbai found roughly 35% of personal income-tax and 43% of corporate-tax collections going unreported; only 3 crore of an estimated 30 crore taxable assessees actually file returns.

• His central recommendation is to adopt the US IRS computer system (introduced by Commissioner Caplin in 1963) using PAN as a Social Security-style identifier, with comprehensive data feeds from banks, registrars, post offices and exchanges, and similar systems in Canada, the UK, Germany, Australia, Japan, Malaysia and Singapore as further models.

• He cites the Fiscal Responsibility and Budget Management Act 2003 and revenue deficits (2.6% of GDP in 2005-06 falling to a Budget Estimate of 1.0% in 2008-09, with the total internal debt projected at Rs. 29,39,238 crore by end-March 2009) to argue that legislation without effective execution is inadequate.

• He closes by quoting B. R. Shenoy’s 1962 warning that black money ‘is well past the take off stage of development’ and that the only remedy is ‘abandonment of the policies of statism’, appealing for citizen pressure on Parliament, judiciary, executive and civil society.