Four ways of bringing back Black Money

The subject of black money stashed abroad has attracted considerable attention in recent times. It was an important issue in last year’s general elections, and UPA government’s inaction was seen as one of the reasons behind its electoral defeat. Recently, the NDA government has introduced the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill 2015, popularly known as the Black Money Bill, in the Parliament. In a discussion organized by the Moneylife Foundation, Dr. Subramanian Swamy (sorry, he doesn’t need an introduction!) shared his views on the bill, and black money in general. Here is a quick recap of the event. (I have given a more detailed perspective on the black money issue in a previous post, click here)

By some estimates, an amount of approximately Rs.120 lac crores is lying outside the country. Dr. Swamy started by saying the bill falls short of the objectives of bringing back this amout. The bill depends on the assumption that the money is detected or declared by the assessee, but does not have steps to actually bring it back. It is essentially a "tax bill", clarifying how to tax what is already known. It can also be misused, as it gives draconian powers to tax officials.

Dr. Swamy said there are two aspects to this whole issue – first, bringing back the money stashed abroad and second, stopping creation of new black money. On the first, he said there are four ways of dealing with the problem.

The Black Money Bill will not bring back the money, said Dr. Swamy at a Moneylife event

One, exchange of information under Double Tax Avoidance Treaties (DTAA). India has DTAA with several countries. An Indian assessee having income in a foreign country (say, Germany) and intent on avoiding tax tells India he is paying tax in Germany, and tells the Germans he is paying tax in India. Actually, he pays at neither place. Such cases can be detected with exchange of information between the two countries. Most media discussion on the black money subject is centered on this aspect. The UPA pursued only this angle during their rule. However, this is a very small aspect of the overall quantum of black money.  

A second alternative is to obtain details of account holders who are holding accounts abroad secretly and illegally, secretly and illegally! In one instance, Germany reportedly bribed bank officials and obtained information about its nationals holding accounts in Liechtenstein, a tax haven in the heart of Europe. France did the same with HSBC.

A third alternative is to extract information by force, used by the U.S. (who else?) against banks such as Credit Suisse and UBS. The U.S. government charged local branches of these banks with crime, arrested its officials and forced the banks to share information.

Finally, Fali Nariman, a noted Indian constitutional expert and lawyer has suggested that an ordinance can be passed nationalizing all foreign assets lying abroad, and asking all other countries to repatriate the money to India. There is a 2005 United Nations Resolution backing this, and the foreign governments will be forced to comply, irrespective of their bank secrecy laws. This has been done very effectively by Egypt to recover illegal assets of its former President Hosni Mubarak, by Libya against Qaddafi and by Philippines against Ferdinand Marcos.

Dr. Swamy said this last method is the best and the cleanest method to recover the money lying abroad. Incidentally, this is the same one I have mentioned in my previous blog post on this subject (link given above) as “the one I have found the most actionable” quoting an article by India’s National Security Advisor Ajit Doval. 

Besides the issue of bringing back money stashed abroad, a second aspect is how to stop its generation in the first place. In this, he touched upon a number of topics such as the need to abolish P-notes due to its role in facilitating money laundering, abolishing income tax, streamlining excise, bringing in e-governance and quickly & efficiently delivering justice to a few ‘big fish’ caught in the act. He recalled how Bernie Madoff was quickly sentenced to 150 years in prison within just six months of his fraud coming to light. On the other hand, Ramalinga Raju's case, which came to light at around the same time, is still dragging in court. Dr. Swamy also stressed the need for deregulation and simplification. For example, he pointed out that more than 2000 products have excise on them, but 90% of excise revenue comes from just 22 products. He emphasized that honesty needs to be encouraged in society. 

There was a very interesting question & answer session at the end, where he took questions from audience and touched upon several other aspects of corruption and black money. On the whole, a very engaging session!