Turning the black money tide: It will require reforms in taxation and real estate transactions

Voltaire wrote “If you see a Swiss banker jumping out of a window, follow him, there is sure to be a profit in it”. Following this train of thought India is seen to be ruined by a cartel of Swiss bankers, terrorists and corrupt industrialists. Unlimited black money is apparently out there, the “hidden hand” behind all unfortunate events to befall our Republic.

A new government need only knock at Swiss banks for untold wealth to be ecured. So goes modern India’s debate on black money. The “hidden hand”, however, needs more definition.

Generated through out-of-book transactions, under-reporting, hawala, international transactions and market manipulation, black money distorts India’s financial regime. While proposed cash restrictions (which could be capped at Rs 10 lakh) and PAN card authentication should limit such transfers, allowing enforcement agencies to act against violators and seize unaccounted currency, offshore banking will still prevail. Without significant penalties (under discussion), black money will flow.

Swiss rumours abound, stating amounts upwards of $20 tn. The Swiss National Bank stated that the total liabilities of Swiss Banks towards Indians were $2.5 bn, just 0.07% of total bank deposits. Under the Double Taxation Agreement with Switzerland, information is shared only if offences are proven and are of criminal nature, making information gathering a tedious affair. Confidentiality issues and disclosures clauses in signed international treaties make revealing any names a tricky affair for the government.

According to the Department of Industrial Policy and Promotion, Mauritius and Singapore, with their small economies, account for the majority of FDI received by India. FII investments held through P-Notes stood at Rs 2.65 lakh crore, an 80-month high in October 2014.

While FIIs are required to report investor identities on a monthly basis, it is possible to hide beneficiary identities through multiple layers. Global depository receipts issued by some Indian companies, listed on the Luxembourg Stock Exchange, can be used to manipulate markets.

Charitable organisations receiving foreign contributions are required to provide an annual return to the ministry of home affairs, without any mention of benefitted recipients. For the determined entity, multiple avenues exist.

Policy incentives matter. India’s black money strategy should consider four pillars. It could encourage tax rate rationalisation, reform vulnerable sectors, support a cashless economy and create effective and credible deterrence.

Tax rate rationalisation, with lower tax rates as an end goal, would increase the tax base and increase compliance with tax returns. Transaction costs can be curbed by a simplification of the taxation regime and its myriad mazes. The introduction of GST will significantly discourage out-of-book sales.

The inefficient real estate sector constitutes nearly 11% of India’s GDP. Given high stamp duties which are set by state governments, underreporting of transactions is quite common. Restricting stamp duty taxes to 5% along with repealing the Urban Land Ceiling Regulation Act and reform of the Rent Control Act can reduce this. Expanding the Property Title Certification system in urban local bodies and computerisation of land registration and property would regulate financing.