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Resource centre on India's rural distress
 
 

Black money black hole
Estimating black money has been a long time preoccupation of economists and tax collectors in India. Several books have been written and several government reports prepared. It is possible to suggest that the policy disincentives that may have contributed to black money generation, like high tax rates, have been moderated, if not eliminated, and that the incentive to declare income has gone up since the beginning of tax and policy reform in the 1990s. Chances are the avenues for black money generation may have also come down. Yet, as long as there remain tax differentials and reasons for not declaring one’s income in full, there will always be some undeclared income and governments should be expected to seek to track and tap such incomes. Moreover, as long as political parties and business persons need cash to make the wheels of politics and business move, rather than cheque books and credit cards, there would always be an incentive to generate unaccounted funds. The incentives for generation of black money, therefore, remain and as long as such incentives remain, government should create disincentives that discourage firms and individuals from not declaring their income. It would be wrong to depend on penal action alone since this could give undue power to tax authorities who may end up misusing their powers. On the other hand, a pure incentives-based system of dangling carrots is not fair to honest taxpayers who declare all their incomes and pay taxes on them. A combination of carrot and stick would probably be the best way to deal with the problem.

It would appear from this week’s statement of Union Finance Minister Pranab Mukherjee that that is precisely his ministry’s approach. The minister has not ruled out some kind of a one-time voluntary disclosure scheme that would enable tax evaders to bring funds home. At the same time, the government intends to work with foreign governments to ensure compliance at the other end. Mr Mukherjee is also right to state that there is no need for the government to go public with the data it has as long as income tax authorities are doing their job. The only thing the government must ensure is that tax authorities do not harass the innocent and let the guilty free for a consideration. To expect that there would be a dramatic surge in capital inflows on account of either the carrots offered or the fear of the stick would be unrealistic. To begin with, all funds stashed away in foreign banks are no longer entirely illegal, with successive governments increasing the amount of foreign exchange an individual or a firm can retain abroad legally. Moreover, few firms and individuals would have their undeclared incomes only in the form of cash in banks. It would be more difficult to track down assets held by Indians abroad. A matter of greater concern ought to be the legal outflow of funds with Indians investing more abroad than foreigners investing in India! This can only be reversed when India becomes more attractive to investors and more of them prefer to keep their funds in India than in foreign banks where such funds may be exposed to greater risk.