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White Paper on Black Money With Grey Areas!

White Paper on Black Money With Grey Areas!
6 Jun 2012
Firstly, the FM needs to be applauded for his efforts to present an all-encompassing report on black money, its ill effects, and strategies to counter the menace and impact on the economy.

The FM did stick to his assurance in the Parliament to present the paper which captures its complex relationship with policy and administrative regime in India. While the paper is merely an outline and detailed reports from the three premier institutions are awaited, what came as a revelation was a bold acknowledgement of inter linkages between corruption and black money. Whereas, corruption is a known fact in public life, it is perhaps the first time the world will view an official acceptance by India.

The report has adequately captured most forms of contributory factors resulting in the peril of unaccounted money and more importantly, its growing significance in all walks of life. Though, the list is long, admission to bring reforms in sectors which are vulnerable deserve special mention. It would indeed be a tall order to deal with all simultaneously. The report has highlighted the need for efficient allocation of the country's natural resources in the form of land, water, spectrum, etc., improvement in transparency for public procurement and the lack of it thereof which has contributed to unaccounted money. It would be interesting to observe how the Apex court deals with the presidential reference on this matter immediately after the summer break in light of its mention in the report! While the confession is welcome in light of recent spate of scandals on allocation of natural resources, at the same time, the report seems to have listed certain forms of business transactions and structure contributing to generation of black money.

Without doubt, all forms of parallel economy are a drag on any form of civil society; however, the report seems to be painting all offenders with the same brush. Unaccounted money generated as a result of illegitimate activities such as drug trafficking, terrorism, corruption has to be dealt with differently compared to other forms of economic offence. I was surprised to note references to certain forms of FDI and FII investments, use of treaties for routing investments, transfer pricing adjustments etc. as forms of generating unaccounted money. Perhaps, there could be cases, albeit as exceptions, where tax payers have made use of such route and they need to be dealt with differently.

Take for example, the Vodafone structure which has been cited as an example for misuse of corporate structure for the purpose of tax evasion. This is despite the Apex court observing that such forms of structure are commonly followed by transnational corporations. Similarly, cases of investments made through Mauritius and Singapore, investments by Participatory Note holders, issuance of Global Depository Receipts (GDRs) have been cited as examples. While the report may be pointing to an exceptional transaction being tax motivated, it has to be kept in mind that majority are genuine investors. Further, since SEBI in any case monitors Participatory Note transactions as well as GDR issuance, it is a bit far-fetched to include such genuine investments within the ambit of the report & perhaps would send wrong signals at this crucial stage.

The report which most felt would deal with the limited issue of unaccounted money stashed in offshore accounts has obviously expanded its brief to address unaccounted money generated as a result of other forms of vulnerable activities. However, in the process, it may have blurred a distinction between tax avoidance and black money which is an outcome of tax evasion. I would have thought that the idea to bring a General Anti-Avoidance Rules (GAAR) in the tax legislation was to precisely deal with all forms of tax avoidance including those meaning from certain forms of tax planning. Hence, a logical approach to the report would have been to deal to all forms of tax evasion including illegitimate activities & corruption. Take for instance; transfer pricing law and the adjustments made by the Indian administration. The report has stated that developing countries may be losing over USD 160 billion in tax revenues a year, primarily through transfer pricing strategies. A question that comes to my mind is - how can transfer pricing strategies be responsible for generation of black money? If at all, such strategies can result in tax avoidance, which has to be dealt with under the transfer pricing legislation, but to stretch the concept of tax avoidance so as to merge it with black money generation, is taking it a bit too far. All forms of transfer pricing adjustments with countries where India has a tax treaty results in the economic double taxation - the law of course applies where tax burden is shifted to a low tax jurisdiction. Before we embark on strategies to deal with the issue, what is most critical is to basket activities into criminal, quasi-criminal & other forms of economic offences. The present approach could lead to witch-hunting and stifle the otherwise low confidence of businesses.

The report has exhaustively listed enforcement agencies currently in existence to deal with the issue. These primarily include the Department of Revenue, CBI, Serious Frauds Investigation Office (SFIO), Narcotics Control Bureau (NCB), etc.

There are other coordinating agencies such as Central Economic Intelligence Bureau (CEIB), National Investigation Agency (NIA), and the High Level Committee (HLC). The long list of agencies makes me wonder if there is really a coordinated attempt to combine the efforts and tasks allotted to each agency to enhance its efficacy. Does decentralisation of various facets of curbing the black money menace actually result in dilution of the overall effort? How efficient have all these agencies been in curbing tax evasion?

In conclusion, it's a bold documented which would require intensive debate, political buy in, vision and the courage to implement such bold reforms. It surely should be the nation's long term goal as there are no quick fixes to such problems.

I liked a comment made by the CBDT Chairman in the report:
The fight against monstrosity of black money has to be at ethical, socio-economic and administrative level. At the ethical level, reinforce values, moral education and at socio-economic level, thrust of public policy is to discourage conspicuous & wasteful expenditure ...
Clearly, regulations and administrative reforms would be last in order as we have them in abundance and several would follow in due course.

Taxand's Take

The report is certainly an eye opener for every Indian given the enormity of sums involved and a starting point for further public debate. In the interim, Parliamentarians in consultative process with businesses will gear up to put in place a more comprehensive and objective plan to reduce if not eradicate the black money disease.

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010

First published in the Business Standard Column 28 May 2012


Taxand's Take Author