Indian black money

Indian black money

In India, Black money refers to funds earned on the black market, on which income and other taxes have not been paid. The total amount of black money deposited in foreign banks by Indians is unknown. Some reports claim a total exceeding US$1.4 trillion are stashed in Switzerland. Other reports, including those reported by Swiss Bankers Association and the Government of Switzerland, claim that these reports are false and fabricated, and the total amount held in all Swiss banks by citizens of India is about US$2 billion.

In February 2012, the director of the Central Bureau of Investigation said that Indians have $500 billion of illegal funds in foreign tax havens, more than any other country. In March 2012, the Government of India clarified in its parliament that the CBI Director's statement on $500 billion of illegal money was an estimate based on a statement made to India's Supreme Court in July 2011.

Black money in Swiss banks

Allegations of over $1.4 trillion black money deposits in Switzerland by citizens of India have been widespread.Above image shows a political rally on black money. However, authorities from Switzerland later declared these reports as fabrication. Citizens of India, reports the central bank of Switzerland, hold about US$2 billion which is less than 0.13% of total deposits in Switzerland from citizens worldwide.

In early 2011, several reports in Indian media alleged Swiss Bankers Association officials to have said that the largest depositors of illegal foreign money in Switzerland are Indian. These allegations were later denied by Swiss Bankers Association as well as the central bank of Switzerland that tracks total deposits held in Switzerland by Swiss and non-Swiss citizens, and by wealth managers as fudiciaries of non-Swiss citizens.

James Nason of Swiss Bankers Association in an interview about alleged black money from India, suggests "The (black money) figures were rapidly picked up in the Indian media and in Indian opposition circles, and circulated as gospel truth. However, this story was a complete fabrication. The Swiss Bankers Association never said or published such a report. Anyone claiming to have such figures (for India) should be forced to identify their source and explain the methodology used to produce them."

In August 2010, the government revised the Double Taxation Avoidance Agreement to provide means for investigations of black money in Swiss banks. This revision, expected to become active by January 2012, will allow the government to make inquiries of Swiss banks in cases where they have specific information about possible black money being stored in Switzerland.

In 2011, the Indian government received the names of 782 Indians who had accounts with HSBC. As of December, 2011, the Finance Ministry has refused to reveal the names, for privacy reasons, though they did confirm that no current Members of Parliament are on the list. In response to demands from the Bharatiya Janata Party (BJP) opposition party for the release of the information, the government announced on 15 December that, while it would not publish the names, it would publish a white paper about the HSBC information.

According to White Paper on Black Money in India report, published in May 2012, Swiss National Bank estimates that the total amount of deposits in all Swiss banks, at the end of 2010, by citizens of India were CHF 1.95 billion (INR 9,295 crore, US$ 2.1 billion). The Swiss Ministry of External Affairs has confirmed these figures upon request for information by the Indian Ministry of External Affairs. This amount is about 700 fold less than the alleged $1.4 trillion in some media reports.

In February 2012, Central Bureau of Investigation (CBI) director A P Singh speaking at the inauguration of first Interpol global programme on anti-corruption and asset recovery said: "It is estimated that around 500 billion dollars of illegal money belonging to Indians is deposited in tax havens abroad. Largest depositors in Swiss Banks are also reported to be Indians". In a hint at scams involving ministers, Singh said: "I am prompted to recall a famous verse from ancient Indian scriptures, which says – यथा राजा तथा प्रजा. In other words, if the King is immoral so would be his subjects" The CBI Director later clarified in India's parliament that the $500 billion of illegal money was an estimate based on a statement made to India's Supreme Court in July 2011.

After formal inquiries and tallying data provided by banking officials outside India, the Government of India claimed in May 2012 that the deposits of Indians in Swiss banks constitute only 0.13 per cent of the total bank deposits of citizens of all countries. Further, the share of Indians in the total bank deposits of citizens of all countries in Swiss banks has reduced from 0.29 per cent in 2006 to 0.13 per cent in 2010.

The Ministry of Finance through the Investigation Division of the Central Board of Direct Taxes released a White Paper on Black Money giving the Income Tax Department increased powers.

Court cases

Supreme Court on black money

Noted jurist and former law minister Ram Jethmalani along with many other well known citizens filed a Writ Petition (Civil) No. 176 of 2009 in the Supreme Court of India seeking the court's directions to help bring back black money stashed in tax havens abroad and initiate efforts to strengthen the governance framework to prevent further creation of black money.

In January 2011, the (SC) asked why the names of those who have stashed money in the Liechtenstein Bank have not been disclosed. The court argued that the government should be more forthcoming in releasing all available information on what it called a "mind-boggling" amount of money that is believed to be held illegally in foreign banks.

The SC on 4 July 2011, ordered the appointment of a Special Investigating Team (SIT) headed by former SC judge BP Jeevan Reddy to act as a watch dog and monitor investigations dealing with the black money. This body would report to the SC directly and no other agency will be involved in this. The two judge bench observed that the failure of the government to control the phenomenon of black money is an indication of weakness and softness of the government.

The issue of unaccounted monies held by nationals, and other legal entities, in foreign banks, is of primordial importance to the welfare of the citizens. The quantum of such monies may be rough indicators of the weakness of the State, in terms of both crime prevention, and also of tax collection. Depending on the volume of such monies, and the number of incidents through which such monies are generated and secreted away, it may very well reveal the degree of “softness of the State.”

— Justice B Sudershan Reddy and Justice S S Nijjar, Supreme Court of India, Source: 

The government subsequently challenged this order through Interlocutory Application No. 8 of 2011. The bench (consisting of Justice Altamas Kabir in place of Justice B Sudershan Reddy, since Justice Reddy retired) on September 23, 2011 pronounced a split verdict on whether government plea is maintainable. Justice Kabir said that the plea is maintainable while Justice Nijjar said it is not. Due to this split verdict, the matter will be referred to a third judge.

Hasan Ali case

Hasan Ali Khan was arrested by Enforcement Directorate and the Income Tax Department on charges of stashing over 36,000 crore in foreign banks. ED lawyers said Khan had financed international arms dealer Adnan Khashoggi on several occasions.

However, media sources claimed this case is becoming yet another perfect instance of how investigative agencies like Income Tax Department go soft on high-profile offenders. Ali's premises were raided by ED as far back as 2007. According several news reports, the probe against him has proceeded at an extremely slow pace and seems to have hit a dead endIndia Today claimed that it had verified a letter confirming the $8 billion in black money was in a Swiss bank UBS account, and the government of India too has verified this with UBS. The Swiss bank UBS has denied Indian media reports alleging that it maintained a business relationship with or had any assets or accounts for Hasan Ali Khan accused in the US$ 8 billion black money case. Upon formal request by Indian and Swiss government authorities, the bank announced that the documentation supposedly corroborating such allegations were forged, and numerous media reports claiming US$ 8 billion in stashed black money were false.  India Today, in a later article, wrote, "Hasan Ali Khan stands accused of massive tax evasion and stashing money in secret bank accounts abroad. But the problem is that the law enforcement agencies have precious little evidence to back their claims. For one, UBS Zurich has already denied having any dealings with Khan."

Public protests and government's response

Further information: 2011 Indian anti-corruption movement and Corruption in India

In May 2012, the Government of India published a white paper on black money. It disclosed India's effort at addressing black money and guidelines to prevent black money in the future.

India has following institutions already preventing, finding and investigating underground economy and black money.

Central Board of Direct Taxes: is a statutory authority functioning across India under the Central Board of Revenue Act of 1963. The Member(Investigation) of the CBDT,exercises control over the Investigation Division of the Central Board of Direct Taxes.The Member is a high ranking IRS officer of the rank of Secretary to the Government of India.The Member controls the:

• Directorate General of Income Tax Investigation

• Directorate of Income Tax Intelligence and Criminal Investigation.

• Chief Commissioner of Income Tax Central.

The Director General of Income Tax (International Taxation) is in charge of taxation issues arising from cross-border transactions and transfer pricing. This organization has been in operation for nearly 50 years, is primarily responsible for combating the menace of black money, has offices in more than 800 buildings spread over 510 cities and towns across India and has over 55,000 employees and even employees who are deputed from premier police organisations to aid the department.

Enforcement Directorate: was established in 1956. It administers the provisions of the Foreign Exchange Regulation Act of 1973 (FERA), later updated to Foreign Exchange Management Act of 1999 (FEMA). It is entrusted with the investigation and prosecution of money-laundering offences, confiscation of the proceeds of such crime, matters related to foreign exchange market and international hawala transactions. This India-wide directorate, with focus on major financial centers in India, has 39 offices and 2000 employees.

Financial Intelligence Unit: has been operating at a separate investigative entity since 2004. This government organization for receiving, processing, analysing, and disseminating information relating to suspect financial transactions. It shares this information with other ministries, enforcement and financial investigative agencies of state and central government of India. Every month, it routinely examines about 700,000 investigative reports and over 1,000 suspect financial transaction trails to help identify and stop black money and money laundering.

Central Board of Excise and Customs and Directorate of Revenue Intelligence: is the apex intelligence organization responsible for detecting cases of evasion of central excise and service tax. The Directorate develops intelligence, especially in new areas of tax evasion through its intelligence network across the country and disseminates information across Indian government organizations by issuing Modus Operandi Circulars and Alert Circulars to apprise field formations of the latest trends in tax evasion. It routinely organizes enforcement operations to unearth evasion of duty and taxes. The Directorate of Revenue Intelligence functions under the CBEC. It is entrusted with the responsibility of collection of data and information and its analysis, collation, interpretation and dissemination on matters relating to violations of taxation and customs law. The organization has thousands of employees and is divided into seven zones all over India. It maintains close liaison with the World Customs Organisation, Brussels, the Regional Intelligence Liaison Office at Tokyo, INTERPOL, and foreign customs administrations.

Central Economic Intelligence Bureau: functions under India's Ministry of Finance. It is responsible for coordination, intelligence sharing, and investigations at national as well as regional levels amongst various law enforcement agencies to prevent financial crimes, generation and parking of black money and illegal transfers. This organization maintains constant interaction with its Customs Overseas Investigation Network (COIN) offices to share intelligence and information on suspected international financial transactions. The COIN offices gather evidence through diplomatic channels from the foreign custom offices and other foreign establishments to establish cases of mis-declaration to help identify and stop tax evasion and money laundering.

In addition to the above primary organizations, India has 10 additional separate departments operating under the central government of India - such as National Investigation Agency and National Crimes Record Bureau - to help locate, investigate and prosecute black money cases. Discovery and enforcement is also assisted by India's Central Bureau of Investigation and state police.

In addition to direct efforts, the Indian central government coordinates its efforts with state governments with dedicated departments to monitor and stop corporate frauds, bank frauds, frauds by non-banking financial companies, sales tax frauds and income tax-related frauds.

MC Joshi committee on black money

After a series of ongoing demonstrations and protests across India, the government appointed a high-level committee headed by MC Joshi (the then Chairman, CBDT) in June 2011 to study the generation and curbing of black money. The committee finalised its draft report on 30 January 2012. Its key observation and recommendations were: 

1. The two major national parties (an apparent reference to Indian National Congress, BJP) claim to have incomes of merely  500 crore (US$91 million) and  200 crore (US$36.4 million). But this isn’t "even a fraction" of their expenses. These parties spend between  10,000 crore (US$1.82 billion) and  15,000 crore (US$2.73 billion) annually on election expenses alone. 

2. Change maximum punishment under Prevention of Corruption Act from the present 3, 5 and 7 years to 2, 7 and 10 years rigorous imprisonment and also changes in the years of punishment in the Income Tax Act.

3. Taxation is a highly specialised subject. Based on domain knowledge, set up all-India judicial service and a National Tax Tribunal. 

4. Just as the USA Patriot Act under which global financial transactions above a threshold limit (by or with Americans) get reported to law enforcement agencies, India should insist on entities operating in India to report all global financial transactions above a threshold limit. 

5. Consider introducing an amnesty scheme with reduced penalties and immunity from prosecution to the people who bring back black money from abroad. 

Tax Information Exchange Agreements

To curb black money, India has signed TIEA with 10 countries - Bahamas, Bermuda, the British Virgin Islands, the Isle of Man, the Cayman Islands, Jersey, Monaco, St. Kitts and Nevis, Argentina and the Marshall Islands - where money is believed to have been stashed away. India and Switzerland, claims a report, have agreed to allow India to routinely obtain banking information about Indians in Switzerland from April 1, 2011. 

Proposals to prevent Indian black money

1. History

Even in colonial India, numerous committees and efforts were initiated to identify and stop underground economy and black money with the goal of increasing the tax collection by the British Crown government. For example, in 1936 Ayers Committee investigated black money from the Indian colony. It suggested major amendments to protect and encourage the honest taxpayer and effectively deal with fraudulent evasion. 

2. Current Proposals

In its white paper on black money, India has made the following proposals to tackle its underground economy and black money.

Reducing disincentives against voluntary compliance

Excessive tax rates increase black money and tax evasion. When tax rates approach 100 per cent, tax revenues approach zero, because higher is the incentive for tax evasion and greater the propensity to generate black money. The report finds that punitive taxes create an economic environment where economic agents are not left with any incentive to produce.

Another cause of black money, the report finds is the high transaction costs associated with compliance with the law. Opaque and complicated regulations are other major disincentive that hinders compliance and pushes people towards underground economy and creation of black money. Compliance burden includes excessive need for compliance time, as well as excessive resources to comply.

Lower taxes and simpler compliance process reduces black money, suggests the white paper.

Economic liberalization

The report suggests that non-tariff barriers to economic activity such as permits and licenses, long delays in getting approvals from government agencies are an incentive to proceed with underground economy and hide black money. Where one cannot get a permit to undertake a legitimate activity, the transaction costs approach infinity, and create insurmountable incentives for unreported and unaccounted activities that will inevitably generate black money. The successive waves of economic liberalization in India since 1990s have encouraged compliance and taxes collected by the government of India have dramatically increased over this period. The process of economic liberalization must be relentlessly continued to further remove underground economy and black money, suggests the report.

Reforms in vulnerable sectors of the economy

Certain vulnerable sectors of Indian economy are more prone to underground economy and black money than others. These sectors need systematic reforms. As example, the report offers gold trading, which was one of the major sources of black money generation and even crime prior to the reforms induced in that sector. While gold inflows into India have remained high after reforms, gold smuggling is no longer the menace as it used to be. Similar effective reforms of other vulnerable sectors like real estate, the report suggests can yield a significant dividend in the form of reducing generation of black money in the long term.

The real estate sector in India constitutes about 11 per cent of its GDP. Investment in property is a common means of parking unaccounted money and a large number of transactions in real estate are not reported or are under-reported. This is mainly on account of very high levels of property transaction taxes, commonly in the form of stamp duty. High transaction taxes in property are one of the biggest impediments to the development of an efficient property market. Real estate transactions also involve complicated compliance and high transactions costs in terms of search, advertising, commissions, registration, and contingent costs related to title disputes and litigation. People of India find it easier to deal with real estate transactions and opaque paperwork by paying bribes and through cash payments and under-declaration of value. Unless the real estate transaction process and tax structure is simplified, the report suggests this source of black money will be difficult to prevent. Old and complicated laws such as the Urban Land Ceiling Regulation Act and Rent Control Act need to be repealed, property value limits and high tax rates eliminated, while Property Title Certification system dramatically simplified.

Other sectors of Indian economy needing reform, as identified by the report, include equity trading market, mining permits, bullion and non profit organizations.

Creating effective credible deterrence

Effective and credible deterrence is necessary in combination with reforms, transparency, simple processes, elimination of bureaucracy and discretionary regulations. Credible deterrence needs to be cost effective, claims the report. Such deterrence to black money can be achieved by information technology (integration of databases), integration of systems and compliance departments of the Indian government, direct tax administration, adding data mining capabilities, and improving prosecution processes.

Supportive measures

Along with deterrence, the report suggests public awareness initiatives must be launched. Public support for reforms and compliance are necessary for long term solution to black money. In addition, financial auditors of companies have to be made more accountable for distortions and lapses. The report suggests Whistleblower laws must be strengthened to encourage reporting and tax recovery.

Amnesty

Amnesty programs have been proposed to encourage voluntary disclosure by tax evaders. These voluntary schemes have been criticized on the grounds that they provide a premium on dishonesty and are unfair to honest taxpayers, as well as for their failure to achieve the objective of unearthing undisclosed money. The report suggests that such amnesty programs cannot be an effective and lasting solution, or one that is routine.

International enforcement

India has Double Tax Avoidance Agreements with 82 nations, including all popular tax haven countries. Of these, India has expanded agreements with 30 countries which requires mutual effort to collect taxes on behalf of each other, if a citizen attempts to hide black money in the other country. The report suggests that the Agreements be expanded to other countries as well to help with enforcement.