The white paper on black money (Paper) has invoked some positive responses, but there is also a fair amount of scepticism. Media reports suggest that the data are not authentic and there is no estimation of the black money currently in circulation. Others have criticised the initiative as an effort to divert the multi-pronged criticism of the government’s performance to effect some damage control on the multiple issues of corruption that have been plaguing the nation.
The parallel economy within the system has been around since I can remember, growing up on a vocabulary which included ‘hawala’, ‘pugree’, ‘namaste’ and similar terms which were uttered in hushed tones behind closed doors. Such acquiescence by the government has boldened players to the extent that the parallel economy has attained scandalous proportions. The Paper attempts to deal with implications and measures which the government proposes to take in order to identify, contain and eventually eradicate the menace, thereby tacitly acknowledging the failure of the existing legal framework.
There are several regulators already in the field who are empowered and equipped to deal with the challenges of the parallel economy and its close nexus with the criminal world, which itself is a threat to the nation at large. Within the Finance Ministry, there are tax and other wings, like, the Ministry of Corporate Affairs and with its Serious Frauds Office, various police units such as the CBI, Enforcement Directorate, and Economic Offenses Wings in the States. Each has its role, and there are coordinating and subordinate agencies.
New tax laws are being introduced, which are expected to work miracles. There are penal statutes, various corporate laws, such as the SEBI Prohibition of Fraudulent & Unfair Practices Regulations. The specific law is the Prevention of Money Laundering Act (PMLA), which provides for full powers of investigation, search, seizure, arrest, prosecution, et al which nonetheless has failed to curb the dark circulation.
The government in this Paper for the first time is making an effort to engage with the populace, more specifically the middle class. This is evident from the character of the solutions proposed, such as, token tax deduction at source on cash purchase, incentives to use debit and credit cards, electronic banking and transfers. The Paper dwells on many factors leading to generation including traditional prudent conservation measures and creation of assets, such as investment in bullion, precious metals and ornaments. Such transactions mostly take place in unorganised unregulated environments, and are on an individual to individual basis, with payments in cash. The Paper seeks to attribute this to absence of and poor implementation of existing regulations, but does not explain why no action was taken. In June 2011, the Income Tax authorities made purchase of ornaments for amounts exceeding Rs 5 lakhs subject to proof of Pan Card. But this won’t work unless the entire data from multiple retail outlets can be centralised and correlated to indentify the perpetrators. The fact that majority of the traders and customers earn and deal in cash is not addressed.
Possibly, the worst and blatant form of circulation of black money occurs in the real estate sector. Originating because of the high rate of stamp duty (16-17 per cent at its worst) and capital gains taxes, the lowering of these levies has not impacted the character or price of the transactions. The entire secondary market is dominated and controlled by middlemen and most buyers have encountered prices being quoted in proportions of cash and cheque. In terms of unfair trade practices, this sector is interestingly de-prioritised by reformists. In the Paper it merits a brief paragraph and proposes deduction of tax at source on the consideration, which is meaningless as it will never impact the cash portion, and push up prices.
In international transactions and money movement, traditionally the scanner continues to be on transfer pricing, a long term bug bear. But the Paper is unable to make out a serious threat. The new kid on the block is of course FDI being routed through beneficial tax jurisdictions and havens and issue of participative notes. On both these issues, the revenue authorities have been raising flags ason non-taxability, whether warranted is a matter of opinion. The government has indicated its position already, by its reference in the section dealing with “Misuse of Corporate Structure” to the Vodafone tax case as providing an instance of such misuse for “avoiding payment of taxes".
Such a statement in a government consultation Paper, which is contrary to the Supreme Court ruling which is in force, is unfortunate and destroys the purpose of the initiative.
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On a parting shot, the Paper is silent on funding of political campaigns - who is going to bell this cat?
Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at kumkum.sen@bharucha.in