India targets 'black' money

Indians have hidden about $1 trillion from tax authorities by some estimates, and New Delhi is stepping up its search at home and in overseas havens.

Investors watch Indian Finance Minister Pranab Mukherjee (top right) present the federal budget to parliament as it is shown on the giant screen outside the Bombay Stock Exchange (BSE) in Mumbai on February 26, 2010. Mukherjee vowed to bring the governments budget defecit under control in the new budget that counts on higher tax revenue to sustain social spending.  AFP PHOTO/ Pal PILLAI *** Local Caption ***  960956-01-08.jpg *** Local Caption ***  960956-01-08.jpg

Indians have hidden about $1 trillion from tax authorities by some estimates, and New Delhi is stepping up its search at home and in overseas havens to increase collections. Anuj Chopra, foreign correspondent, reports India's tax collector is making a big push to grab its share of the country's massive off-the-books - or black - economy, particularly those funds stashed abroad. As part of the effort, the government plans to revise its tax treaties with at least 25 countries and renegotiate the agreements with 51 others.

After introducing its annual budget last week, the government also plans to study the scale of tax evasion, which is estimated by the finance ministry to total about 40 per cent of the country's GDP. "My government has undertaken a number of steps to unearth unaccounted money parked outside India," the Indian president, Pratiba Patil, told parliament last week. "Renegotiation of the tax treaty with Switzerland is in process. India is an active part of the global efforts to facilitate exchange of tax information and to take action against tax evasion."

Most of India's black money - estimated to be about US$1 trillion (Dh3.67tn) - is believed to be parked in bank accounts in Switzerland. Swiss law and tax agreements prohibit third countries from general searches for possible tax evaders, or "name-fishing", says the Swiss Bankers Association. The Indian government hopes that situation will change after its tax treaty with the country is revised. Pranab Mukherjee, the finance minister, says India is only seeking information on select bank accounts, which would expose tax fraud on a large scale.

The Swiss Bankers Association has "not refused [to divulge information]. They have suggested they are not for fishing, and we are also not interested in fishing their whole list [of bank accounts]," he says. India's shadow economy has flourished for decades, reducing tax collections and damaging the country's security interests, the government says. "The opaque system of exchange of information in these tax havens and their non-compliant behaviour are matters of concern not only for revenue base but [are] also linked to financing of activities which are detrimental to national security interests," says Mr Pranab.

Most of the countries that India seeks to renegotiate tax treaties with are low-tax or no-tax nations, and most of the foreign investments into India are routed through these countries. In his book The Black Economy In India, the economist Arun Kumar estimates that the country has missed out on more than $150 billion in gold imports and has suffered more than $100bn in capital flight since independence in 1947. Most of the black money in Swiss banks is believed to be public funds siphoned off by corrupt politicians, bureaucrats and businessmen.

The latest Transparency International report ranks India a dismal 84 out of 180 countries it grades in terms of corruption. The Political and Economic Risk Consultancy, based in Hong Kong, has rated India the second-most corrupt country in Asia, with a corruption index grade of 8.9 on a scale of 10, just behind Indonesia. Indians, analysts say, need to kick their gold buying habit because it supports the black economy, as people divert vast sums of undeclared income into gold and keep it far from the prying eyes of tax inspectors. More than 15,000 tonnes of gold, estimated to be worth US$600bn, or 60 per cent of India's GDP, is hidden away in private lockers by Indians, according to the World Gold Council.

India has tried to combat tax evasion by requiring an identification number for all major financial deals. The permanent account number (PAN) is a compulsory 10-character number issued to taxpayers by the tax department. But many transactions, especially those related to property, are conducted in cash and are unlikely to be reported. In the 2007-2008 fiscal year, the country's high-value transactions amounted to more than 55.7 trillion rupees (Dh4.44tn), according to India's Annual Information Return filed with the government. But nearly one third of the 3.3 million transactions were conducted without a PAN. In many other transactions, PAN numbers were fake.

Despite the tax losses, some economists argue that the country's shadow economy acts as a bulwark during times of crises, as the secret funds are pulled out and used. They say India maintained a decent growth rate of nearly 7 per cent even during the worst of the global economic crisis, and sailed through the liquidity crunch that slowed many other national economies, in large part because of black money.

According to the National Council of Applied Economic Research, the 80 per cent of India's population that resides in rural areas and accounts for 65 per cent of the country's consumption contributed a big chunk to the country's recent growth. This consumption mainly came from a cash-based economy. India has never faced an economic crisis, despite its gaping fiscal deficit, in large part due to the black money, some say. And the gold locked away in private lockers, some economists say, is a great source of confidence for investors.

"The challenge for the policymaker today is to come up with a radical idea which creates a big enough incentive for the shadow economy to eventually get registered as part of the official GDP," MK Venu, the editor of The Financial Express, a business newspaper, wrote in a column. "The finance minister can use this year to seriously kickstart the process of gently coaxing the shadow economy to come out into the open."

That has become increasingly necessary, experts say, to fill India's yawning fiscal deficit and finance the country's popular social welfare programmes. Social sector spending has grown from 2.65tn rupees in fiscal 2003-2004 to 5.6bn rupees in the 2008-2009 fiscal year. "For such spending to continue, the government must treat the task of widening the tax base with the utmost urgency," Mr Venu. wrote "Hypothetically, if the shadow economy becomes part of the official GDP, then the problem of a high fiscal deficit run by the centre will also get solved automatically."