Checking Tax Evasion

There is increasing recognition of the urgency with which the menace of tax evasion, black money and corruption needs to be tackled. These have become burning issues due to the need to close the fiscal deficit, domestic pressure and increasing pressure in international forum such as G20.

Global Financial Integrity estimates illicit flows out of India of USD 462 Billion, between 1948 and 2008. The Budget FY’13 took a few measures to check tax evasion. In this Budget, the Government has now made it mandatory for disclosure of all assets held abroad.

India has recently signed the Multilateral Convention on Mutual Administrative Assistance on tax measures. This will enable better coordination among countries in matters related to tax information sharing. Also announced in the Budget FY’13,

• 82 Double Taxation Avoidance Agreements (DTAA) and 17 Tax Information Exchange Agreements (TIEA) have been finalized. The FM also stated that information regarding bank accounts and assets held by Indians abroad has started flowing in.
• Dedicated exchange of information cell for speedy exchange of tax information with treaty countries is fully functional in CBDT.

Further, Budget announced the establishment of Directorate of Income Tax Criminal Investigation in CBDT. A white paper on Black Money will also be presented in the current session of Parliament. Measures taken to deter the generation of unaccounted money include:

• Tax to be deducted at source on purchase bullion or jewellery worth over Rs 2 lakh in cash
• Tax to be deducted on transfer of immovable property (other than agricultural land) above a specified threshold
• Increased onus on closely held companies of proof for funds received from shareholders as well as taxing share premium in excess of fair market value
• Taxation of unexplained money, credits, investments, expenditures etc. will now be at the highest rate of 30 per cent irrespective of the slab of income.

The Budget has also proposed the introduction of a General Anti Avoidance Rule (GAAR) to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel.

Despite the World Bank Stolen Asset Recovery Initiative (tracing-freezing-ceasing-repatriating) and other information sharing initiatives at international forums and G20, a lot remains to be desired. The Financial Secrecy Index of the Tax Justice Network ranks countries according to their performance on tax information and financial secrecy.

Developed countries along with their satellites are the worst performers. Interestingly, most of these are a part of G20. This makes G20 an apt forum to carry negotiations and the dialogue further. Steps taken in India are small yet concrete and the initiative needs to be taken forward in the right earnest.

The Cash Cow

In view of the latest sting operations that show crores of cash exchanging hands:

The problem is grave- a mix of greed, power, exchange of favours, underground economy (see The exponential rise of India's Black Economy, published Aug'10)

The solution needs to be a mix of change in regulation, monitoring, taxation laws (see Funding Political Campaigns, published Nov'10)

Funding Political Campaigns

Various reasons that suggest against the state funding of political campaigns. For one, political campaigns have become excessively costly. A less compelling, why should the taxpayer take the burden of funding campaign of those its ideologies do no jibe with? But voters do need to be aware of each one’s manifesto to be able to decide.

Corporate funding could, idealistically, could reduce the under-table black transactions. It could be Pro-Reforms, given that corporates would now have to earn funding, based on work done in past, policies and promises to deliver. However, corporate funding continues on an anonymous basis and a ‘quid pro quo’ basis. It lists towards support of more networked individuals, and are a natural bane to independent or new candidates.

Numerous examples right at home, right from Enron-Dabhol Power project, to the Reddy Brothers in Karnataka, the Maytas Infra group and the allotment of 2G Spectrum licences!

The various touted policy options include placement of spending limits. These of course would be unfair to the new candidates. In early 2010, it was promulgated by the US Supreme Court: “corporate funding of independent political broadcasts in candidate elections cannot be limited pursuant to the right of these entities to free speech’.

The more effective less easy solution seems to be increasing disclosures.

A thought crossed my mind, that some of the campaign expenses should be made evenly, equally free for all candidates. Possibility in terms of print material, airtime, fuel costs, and paid for by the respective corporations. Presumably this will lower the demand for additional funds. Of course, the brunt will be borne by the limited Media and Fuel industries.

The corporate funding to political parties, from a purely practical point of view, cannot be eliminated, not now when we are on our way to fiscal consolidation, and yet far from FRBM targets.

The exponential rise of India's Black Economy

The rising levels of currency with public are an indication of the rising unaccounted transactions, out of the tax nets:

Currency is withdrawn from the banking system at some point during the multiplier process after which it falls out of the tax net. If after this point in time, it is assumed that money changes hand even once (i.e. multiplier = 2), size of transactions that are unaccounted have doubled to 16 lakh crores from 8 lakh crores in the short span of 2006-2010.

A case in point is the FCI procurement payments, which are made in cheques up to the middle men arthias, but ultimately reach the farmer in cash who further uses the currency and makes some more cash transactions.