The wrong approach

Draconian measures on black money a problem

Among the most discussed proposals of the Union Budget are the legislative provisions outlined by Finance Minister Arun Jaitley to address the question of money hidden from the taxman, or "black money". On domestic unaccounted wealth, the finance minister said that a fresh and strong "benami" transactions law would be drafted - benami transactions are those with false names. But black money abroad appeared to receive special attention. Four strong penal provisions were announced. First, the concealment of income or of assets and the evasion of tax related to foreign assets will lead to 10 years of rigorous imprisonment, if proved. Even the failure to file returns or to "inadequately" disclose foreign assets will have a sentence of seven years' rigorous imprisonment. Offenders will not be allowed to approach the Settlement Commission to come to an agreement about tax dues. And there will be a penalty to pay at the rate of 300 per cent of the tax due.

Few can disagree with the basic substance of the concern. Tax evasion is endemic in India, which has far too limited the base of taxpayers. The political salience of the fight against black money is also undeniable, and so the government could not be seen to be slow in framing tougher legal provisions. Yet the final decision by the government reveals that it is unwilling and unable to step out of an outdated mindset. After all, the idea of such stringent penal provisions gives an enormous amount of discretion and power to the taxman, when the government should be moving away from a confrontational and adversarial approach to tax collection. Many have been reminded of the awful days of the Foreign Exchange Regulation Act, or FERA, which was introduced as a "temporary" measure in 1973 but stayed as the law of the land for three decades. It is worth noting that the existence of FERA did not stop the well-connected from building up ill-gotten wealth overseas. The government has now merely introduced a lever for harassment while doing little to address the real problem.

If the government was serious about black money, the approach should have been straightforward, and need not have involved tinkering with the criminal code. First, the government should have recognised that the real problem lay in India and not in Switzerland. The larger amount of black money either goes into domestic real estate or bullion, or is round-tripped back into India anyway. So the government should have instead worked to ensure that black money left real estate - not through making the payment of more than Rs 20,000 in cash for property a crime, but through following more sensible recommendations of the 2012 white paper on the subject, such as deducting tax at source in such transactions. Second, basic routes into India for black money, which in addition drive up asset prices and distort the market, should be closed off. Instead of announcing penal provisions, why is the government not closing off the "Mauritius route" for fund flows into India? It is known to be misused. Instead of going back to the failed methods of the 1970s, deal with black money as a 21st century problem.