India's push to tame tax evasion

India Dispatch: Authorities are trying to identify and tax vast quantities of money illegally hidden by companies and individuals. The government estimates that the potential revenue from this 'black money' is more than twice the fiscal deficit.

Income tax officials count currency recovered during a raid at the residence of government officials in Bhopal, India, last year. Sanjeev Gupta / EPA

Two years ago, on a balmy afternoon in Kolkata, crisp currency notes rained down from the sky.

Well, not really, but for many onlookers, the windfall seemed heaven-sent. The dazzling dance of cash started from the 15th floor of a decrepit office building in Chowringhee, one of the city's main thoroughfares.

Beggars on the street scurried about, treating themselves to fistfuls of money. Some were knocked down by thick bundles of cash hurtling from above, before white-coated policemen cordoned off the area.

As it turned out, the money was not a handout from heaven. Executives at an engineering company in the building had caught wind of an imminent raid by income-tax authorities. In a last-minute effort to escape punishment, they began dumping bundles of bills from an unreported stash of 150 million rupees (Dh12.2m).

This incident is hardly an aberration.

In India, as in a number of other south Asian countries, tax evasion is endemic, starving the government of revenue and retarding the pace of economic growth and social development.

This has also spawned a shadow economy, with a large number of delinquent taxpayers believed to be hiding wealth - what is known as "black money".

India's finance ministry estimates that the off-the-books economy totals about 40 per cent of the country's GDP or about US$500 billion (Dh1.83 trillion) annually.

Global Financial Integrity, a think tank based in Washington, estimates that between 1948 and 2008, Indians transferred nearly $462bn of ill-gotten wealth overseas. The figure does not, however, account for the entire cost of corruption in India, as some of it is kept onshore.

Most of the black money in overseas banks is believed to be public funds siphoned off by corrupt politicians, bureaucrats and businessmen.

In recent months, various civil rights activists - including the ochre-robed yoga guru Swami Ramdevand the Gandhian reformer Anna Hazare - have orchestrated high-decibel protest campaigns against black money, galvanising millions of supporters.

The protesters have criticised the government's tepid approach to corruption and have demanded it act aggressively to bring back black money parked in bank accounts abroad.

Swami Ramdev demanded that the government introduce stiff punishment, even the death penalty.

Many considered that suggestionextreme, but the authorities are considering making tax evasion a criminal offence instead of a civil violation.

Prakash Chandra, who heads India's Central Board of Direct Taxes, suggested that exemplary punishment would be a strong deterrent.

"The idea is to identify loopholes and plug them, wherever needed," Mr Chandra said. "If we still find deficiencies, then we will examine the possibility of introducing a new law."

The government estimates that if India's shadow economy were integrated into the official GDP - with what is now undeclared income being taxed at the official rate of 30 per cent - 7.5tn rupees of revenue would be realised, more than twice the fiscal deficit.

Last year, the government increased its social spending to $47bn, taking the fiscal deficit to a 16-year high. The landmark rural jobs scheme - which promises every rural family 100 days of employment - costs 1 per cent of GDP. The food security bill - which promises to put food on every table - costs $2bn.

These schemes are crucial, analysts say, in fighting hunger and malnutrition, among the estimated 800 million Indians who live on less than $2 a day. In the 2009 Global Hunger Index, compiled by the International Food Policy Research Institute in Washington, India ranked 65th among 84 nations, well below countries such as North Korea and Zimbabwe. But the government is struggling to fund these schemes.

Last year, in a bid to recover money hidden abroad, the government renewed efforts to revise its tax treaties with at least 25 countries and renegotiate agreements with 51 others. Most of the countries with which India sought to renegotiate tax treaties are low-tax or no-tax nations, and most foreign investment in India is routed through these countries.

But many analysts argue that the crackdown on economic offenders must begin at home.

Only 3 per cent of India's 1.21 billion people pay income tax. In the past, India has tried to combat tax evasion by requiring the use of a permanent account number (Pan) for all major financial deals. Pan is a 10-digit taxpayer identifier. But in India, many transactions, especially those related to property, are conducted in cash and are unlikely to be reported.

The remedy does not lie in introducing new laws, some analysts say.

"The law is already there," says Rahul Garg, the executive director for tax and regulatory services at PricewaterhouseCoopers India. "What is needed is the will to implement it."

Under the existing income tax law, introduced in 1961, tax evasion is punished with imprisonment ranging from three months to seven years. Offenders also face heavy fines. Seven-year sentences are rare.