Shutting the black money window

Written by T V mohandas Pai | Updated: Jul 1 2014, 14:34pm hrs
Black moneyVarious reports and assessments made over the years estimate the black money amount at 20% or even at 100% of the GDP.
There are numerous estimates about the quantum of black money in the Indian economy. Various reports and assessments made over the years estimate the black money amount at 20% or even at 100% of the GDP. Addressing the strong concerns expressed by the Supreme Court, Parliament and the Indian public at large, the former finance minister Pranab Mukherjee presented the White Paper on Black Money in May 2012.

If only the finance minister had looked out of his window to see the major sources of black money generation, he could have taken action to reduce it before presenting the report.

The main source of black money generation in India is real estate transactions. It is primarily done through undervaluation of land and built property to evade capital gains tax and very high transaction cost, primarily stamp duty. The National Capital Region and Mumbai lead in such transactions. For over 60 years, the government has just spoken about the menace of black money but done precious little to root out the causes.

It is suggested that, as in the case of shares of listed companies, in case of property held for three years there should be a full exemption for a period of five years, before further review. This would result in the true value being declared, full receipts getting into the formal economy, the establishment of correct value and, over a period of time, receipts being subject to taxation. Clearing up major amount of black money from the real estate sector would have a massive impact across the country. Revenue loss would be minimal as exemption is provided on reinvestment and the extent of evasion would be limited.

It is also suggested that in order to make investment in land and real estate attractive and to eradicate black money, the transactions should be made VATable.

Another major source and major challenge is gold. Reports indicate that Indians own some 25,000 tonnes of gold and add another 800-900 tonnes every year. The estimated value of gold is $1.2 trillion. Sadly, despite huge stock, the local sales are very low and additional requirements are met through even higher imports.

It is suggested that gold and bullion held by individuals and declared in wealth tax returns and held for over three years should be exempt from capital gains tax. Capital gains tax receipts from sale of gold are limited. This move will ensure that gold sales do take place, gold is recycled, local sales increase and imports come down. It would also imply that idle assets would come into circulation and cleanse the system. The government can experiment on this for five years. It will make India a price setter and not price taker globally and enlarge the gold business.

Both these changes would reduce black money generation and cleanse the system. Policy should encourage honesty and back honest citizens. This will also lead to large-scale reporting of wealth.

(Assisted by Rajesh Moorti)

The author is chairman, Aarin Capital Partners