On first principles, there is no reason for criticising the white paper on black money for not having thrown up a figure for all and sundry to chew on. The Central Board of Direct Taxes (CBDT) was not tasked to come up with one and it does not have the expertise to develop an estimate, which is essentially an economists? domain.
The Board, in any case, should not have been asked to come up with this report either, as it is neither the policy-making arm of the finance ministry nor in its history has it done any commensurate work on public finance. At times, individually capable officers from the Board have been seconded to committees set up independently by the government on various tax issues. But as finance minister Pranab Mukherjee was in a hurry to show that the ministry was not sleeping on his watch, the paper is now in the public domain.
As a result, you get the distinct feeling after reading the paper that it has not been written by the same team across all sections. The difference makes itself obvious in chapters 1 and 5 that look at the economic rationale for how black money is created and compare those with the rest, which is a breathless recital of the annual report of the Board but with a different set of headings.
One would like to make this difference as the white paper has a very strong line of thought on globalisation, which is hopefully not the settled view of the government. Chapter 4 of the paper clearly asserts that globalisation and economic liberalisation (it mentions both) has led to (an uncomfortable) rise in cross-border transactions. It goes on to say that most of these transactions originate and end at various arms of multi-national corporations. These corporations then misuse transfer pricing provisions to transfer capital from high-tax jurisdictions to low-tax jurisdictions and block tax probes on those as they have more resources than the tax departments of countries like India.
It then says that this is the principle reason for the generation of black money and suggests a five-point line of action to block them. There is only a passing reference to the possibility of black money being generated within the economy through corruption in government schemes (NRHM scam, petrol diversion or 2G scam did not happen).
Also, while chapter 1 and later chapter 5 establish why the breathless estimates of black money by agencies like Global Financial Integrity for India are highly suspect, chapter 4 makes the reverse claim. ?In view of the report of GFI relating to mis-pricing, a committee was constituted by the Finance Minister to strengthen the transfer-pricing provisions in the Income Tax Act 1961. Various recommendations made by the committee have been implemented by way of legislative amendments through the Finance Acts 2011 and the Finance Bill 2012?, it says.
On the same issues, chapter 5 makes no mention of this line of thought. Instead, it is clear that it is government actions including reduction in tax rates, making tax payments easier and reforms in vulnerable sectors along with credible deterrence that are the way forward.
The vulnerable sectors it lists are real estate, bullion trade, financial sector as an involuntary conduit, non-profit sector and allocation of natural resources by governments. A major point of discussion in this context it makes is the role of the cash economy. It rightly points out that there is no bar on anyone holding any pile of cash (imagine Ponty Chadha even if he had a supposed cache) and this means a tax guy can do nothing about them if the person can prove there is a good reason why he held on to the pile. Changes here mean a huge political challenge. If the government was keen to take the war to the opposition camps, this was a powerful line of argument to do so. But then no political party would want this to be investigated. Much better then to blame the black money issue on ?dirty foreigners? and get on with life.
So, obviously, there are two significant lines of thoughts that run in the government on black money. This is where the trouble lies. Mukherjee?s ministry and by extension the government itself is not clear about the dimension of the problem.
The reforms suggested, such as an upper limit on the use of cash, incentives for use of credit and debit cards, building up of data bank on non-governmental organisations including the cooperative sector, are all political hot potatoes for this government and possibly also for most others. They go against the aam aadmi theme zealously pursued by the UPA government so far. There is some more of this, such as the prevention of misuse of corporate structure and, surprisingly, those too are stymied. What it does not mention, however, is that there are 16 national agencies, leaving out the economic offences wing in every state police set-up to bust black money, each armed with a raft of laws. This excludes the two Boards of Direct and Indirect Taxes.
Instead, the paper has become a clever ruse by the CBDT to demand a massive increase in manpower, including a huge retinue abroad. The department has the largest number of vigilance cases lined up among all central government departments. There is definitely a ground for increase in posts but a Board that has filed only 1,485 complaints in seven years and secured conviction in only 123 cases out of those needs to be sent through the wringer first before Parliament sanctions such a mammoth rise in expenditure.
The Parliamentary Standing Committee on Finance has itself pointed out that the Board has issued over 13 crore PAN cards but has just over 3 crore income tax assesses to show for it. There have been several audit reports that have pointed to the serial underestimation of tax cases that run into several thousand crore of rupees.
As was pointed out in the FE editorial (Shady money, May 22 ?http://goo.gl/dP2eH?), tracking of black money is a function of an efficient state that doesn?t need tax guys to make periodic visits to European countries. But destructive deployment of such a scare to go after trade and industry can be highly counter-productive, as the rupee gyrations are showing up.
subhomoy.bhattacharjee@expressindia.com