So many things have happened in the world. There is a war in Gaza; temples are being built, from Ayodhya to the Middle East; Donald Trump is in trouble; the Houthis are angry; the US Supreme Court is announcing judgments on television…the list goes on. I was just wondering that given all this noise—or should I, in the interests of fairness to the discipline of statistics, call it white noise?—how come we have forgotten old concerns? Nobody talks about black money anymore. Even the Supreme Court of India merely alludes to the fact that there are many ways of tackling coloured money. No newspaper writes about it and TV channels are busy with other matters.
But, as a country, does it make sense for us to forget about black money? After all, we have had many august commissions of inquiry on the messy subject. More importantly, there is virtually no Indian citizen who has not encountered black money and, in most cases, not actually dealt with it. Have we just become immune to this ailment?
Even as I was thinking about this unwholesome subject, I came across a book that got me a little more engaged. Professor R Vaidyanathan’s Black Money and Tax Havens was actually not an eye-opener at all. It simply confirmed what all of us know and have quite calmly internalised. The erudite professor makes a simple point: “Not all black money is a result of corruption. But all corruption does lead to the generation of black money.”
A business obstacle, and a ‘lubricant’
Someone bribing a tehsildar for a certificate, a street hawker giving protection money to a policeman, a middle-class parent “influencing” an official in a desirable English medium school for their child’s admission, a businessperson paying a government official to “release” legitimately due funds, or the owner of a small factory paying off an “inspector” even when no wrong has been committed—we have all participated in the “generation” of black money.
Professor Vaidyanathan concedes that big businesses do pay large sums as bribes. But he also points out that the street vendor or the small shopkeeper pays a larger percentage of her turnover and profits in bribes. He estimates that daily collections from these small businesses in major cities run into hundreds of crores of rupees.
The result is that legitimate economic activity by relatively poor people gets stifled and India’s overall national output declines. If your profit margin is 12 per cent and you end up paying 10 per cent as corruption transaction costs, then life is difficult indeed. This prevents many businesses from taking off while the failure rate is very high among those that do get established. In any event, good businesses live in the shadow of dismal profitability. And this despite heroic and herculean efforts on the part of these unrecognised entrepreneurs in the “unorganised” sector, as they are derisively referred to. One has to wonder if our police and municipal governments would prefer hard-working shopkeepers and street vendors turning to crime instead of continuing to make a living through trade. As a nation, we need to ponder over this.
The worthy professor goes on to note that black money is not uniformly evil. For many businesses, it is the only source of funding. The costs and the complexity associated with record-keeping, audits, and certifications deter small businesses from approaching financial institutions. Informal cash disbursement in the word-of-mouth market is the only thing that works. He makes a very strong counter-factual case that black money actually “lubricates” our economy and should not be summarily condemned.
Land, political dynasties, and black money
When it comes to political parties, we are faced with more intriguing matters. For small and even large political parties, land is the principal source of corrupt funding. Changing land-use rules, permitting registrations and transfers, or sometimes even simple non-interference in land use through obscure environmental regulations—all of these become an opportunity for political parties to collect bribes. It is not accidental that state governments have actively lobbied to keep real estate outside the GST system. This ensures continued opaqueness, a pre-requisite for easy bribes.
Professor Vaidyanathan offers an interesting explanation for why political parties become family enterprises. As black money accumulates in land, benami properties, or cash, political party leaders no longer trust their subordinates to handle these large sums without appropriating bits for themselves. The only persons they can trust are family members. Hence, party appointments are given to spouses, children, nephews, nieces, and so on in order to ensure that these massive funds stay “safe”.
I have observed that this phenomenon has spread beyond state parties to panchayats as well. Panchayats in areas close to urban agglomerations seem to be quite prone to this, going by recent news reports. As land values have increased, panchayat leaders appear to have raised their corruption “charges”. Moreover, leaders often induct spouses and children into village politics, arguably to maintain control over the corruption rents collected. I feel sorry for lovers of decentralisation; the intention was to bring governments closer to the people. But the ironic reality in India is that it has brought corruption closer to the citizenry.
The truth about tax havens
As the title of Vaidyanathan’s book suggests, it contains a great deal of information on black money “stashed” away abroad in tax havens and dubious jurisdictions. However, I think the good professor overlooks the history of perverse incentives that have led to this situation.
We need to remember that in 1940, the British government introduced exchange control in Britain and India as a “temporary” wartime measure. Given our post-Independence love for the Soviet Union, we made it permanent and even progressively made these measures more stringent. In 1973, we enacted the draconian Foreign Exchange Regulation Act (FERA).
If you enjoyed numismatics and collected even a couple of foreign pennies, you were liable to be imprisoned. The fear of having money “locked up” in a hostile near-communist country was at the root of the early exodus of funds. In 1973-74, when the highest marginal income tax rate was 97.5 per cent, the rich as well as many of the quasi-rich were left with no alternative but to start establishing “foreign” accounts.
Things have improved after the 1991 economic liberalisation and recent regulatory relaxations. But the fear remains among businesspersons and even ordinary citizens that the state may rudely intervene and expropriate wealth in one form or the other. Businesspersons openly express fear that there is no guarantee that FERA will not be reinstated. After all, the party currently in opposition did introduce retrospective taxes in 2012. Their track record is not exemplary. Recent calls by leftists for the re-introduction of a wealth tax and estate duty, the former scrapped by the BJP government in 2015 and the latter in 1985 by a Congress dispensation itself, have increased the sense of insecurity. One can never say what will happen. Hence insurance is needed. In order to “technically” stay within the law, many business families have sent one child out to be an NRI. NRIs are, after all, gods who are exempt from laws that we RI mortals have to face every day. Even the present citizen-friendly government has imposed a “non-tax” to be deducted on foreign remittances. This is not a signal that adds to a sense of security.
In times gone by, when there were many kingdoms in our country, it was quite common for subjects (they were all subjects—not citizens) to move from one principality to another when taxes became too rapacious or when corrupt officials became too tyrannical. Today, citizens move their funds and one family member instead of the entire clan emigrating. When the East India Company’s Gerald Aungier became the Governor of Bombay, he issued a public proclamation inviting Indian merchants from neighbouring regions to relocate there. He promised them low taxes and no threat of expropriation or even attacks in the event of ostentatious displays of wealth. Aungier was immensely successful. Merchants flocked to Bombay.
Professor Vaidyanathan’s descriptions of how tax havens operate are detailed and lurid. You could almost be reading a John le Carré thriller. Intriguingly, despite all the attempts at secrecy, there is plenty of information available in the public domain. We should all be careful about believing stories that claim information is missing. The professor also makes the case that despite a lot of information being available, most countries, with the possible exception of Germany, do not actively try to repatriate funds and tax them. Many of the largest corporations in the world blatantly attempt to pay less tax or, many times, virtually no taxes. Tax havens are perhaps necessary lubricants and safety valves, leading sovereign states to turn a blind eye to them.
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Old wine, but smaller bottle
Some lessons for us as a country:
— We need to eliminate and reduce laws, rules and regulations that increase corruption. We should pay particular attention to those laws that inflict heavy burdens on our poor.
— Digitisation can and will help the so-called unorganised sector gain access to institutional finance and thus reduce dependence on black money. We have started well. We should continue with more digitisation.
— We must bring real estate under the GST system. This will greatly reduce corruption and black money. This measure will be strongly resisted by most political parties. But as a country, we just have to bite the bullet on this one.
— We must simplify and, in many cases, eliminate archaic land laws. Land has become the single greatest source of both corruption and black money.
— Former finance minister Arun Jaitley promised that the government would not rely on retrospective tax laws. Unfortunately, there is continuing scepticism on this score. We must ensure that there is a strong consensus across all parties on this front.
— We must strongly resist the frequent ill-advised outbursts from people that rapacious wealth and estate taxes should be re-introduced. The mere existence of such talk provides a perverse incentive for creating and retaining black money.
— Lastly, we must convey the message that information about tax havens isn’t as secretive as many believe. Those who think they can evade consequences by using egregious means to squirrel away funds must be told otherwise, even if it requires public shaming.
None of this will eliminate black money, which will stay with us until the end of time. We can only hope and strive to reduce it, minimise its distorting effects on our economy, and ensure that the poor are not bearing disproportionate costs. A modest goal along these lines is something that we can, and should, achieve. We can opt for old wine in a newer, smaller bottle.
Jaithirth Rao is a retired businessperson who lives in Mumbai. Views are personal.
(Edited by Asavari Singh)