Published on 22nd May 2012
The government has suggested in its first-ever official document on black money that a lot of the illicit cash stashed away overseas over the years may have come back into the country as investments, seeking to debunk the commonly-held notion that hundreds of billions of dollars of Indian money was held illegally in Swiss banks. The document listed participatory notes (PNs), foreign direct investment (FDI) flows routed through low-tax countries and complex corporate structures as possible contributors to the scourge, but steered clear of naming offenders or putting an estimate on black money, provoking critics to slam it as more of a whitewash than a white paper. The White Paper on Black Money significantly singled out the Vodafone tax case as an example of misuse of corporate structure to avoid paying taxes, further proof of the intensity of the finance ministry’s feelings on its tax dispute with the UK firm and suggesting a compromise was unlikely.
Presented by Finance Minister Pranab Mukherjee in Parliament, the document said illicit money parked outside India may have been brought back as FDI through Mauritius and Singapore and via stock market transactions involving participatory notes and global depository receipts, indicating a tighter scrutiny of these inflows in the future. The release of the white paper, a day before the third anniversary of the UPA government, comes when the ruling coalition has been mostly on the defensive in its second term in office, buffeted by a series of scandals, popular anti-corruption agitations and scathing court judgments. Not helping the government is the commonly-held notion that hundreds of billions of dollars have been spirited out of the country and stashed away overseas. US based Global Financial Integrity, a non-profit research body that has long crusaded against illegal capital flight, said in 2010 that India had been drained of $462 billion between 1948 and 2008.
But the white paper said some of these numbers were over the top and baseless.
"Some of the widely-circulated figures about black money of Indians stashed abroad are baseless exaggerations," it said. Scathing Criticism of Report.
There is strong likelihood that substantial amount of such money transferred abroad illicitly might have returned to India through illicit means," the white paper said. It cited the case of a widely circulated 2006 report attributed to an entity called the Swiss Banking Association, which said Indians had $1,456 billion stashed away overseas. The white paper said actual checks showed no such organisation existed and the money held by Indians in Swiss banks was less than Rs 10,000 crore ($2 billion).
All this did little to silence the government’s critics, who were especially scathing about its failure to give out an estimate of black money and disclose the names of tax offenders with large fund stashed overseas.
"This white paper is in reality a non- paper. It is rather like a bikini as it conceals all the essentials and reveals only the non- essentials," said senior BJP leader Jaswant Singh. "The shortcomings include no reliable quantification of illegal money." The government has tasked three domestic research institutions with arriving at estimates of black money. Their reports are expected later this year.
"I would have been happy if I could have included the conclusions of reports of three premier institutions that have been tasked to quantify the magnitude of black money," Mukherjee wrote in the foreword to the 108-page white paper.
The government had agreed to bring out the white paper during the debate over black money and corruption forced by Anna Hazare’s anti-graft campaign.
The government said it was bound by tax treaties not to disclose the names of tax offenders with funds overseas. But this failed to cut ice with another of its bitter critics, yoga guru Baba Ramdev, who called the explanation hogwash. "Lack of political will and the government's lopsided intention is clearly getting reflected in its policies when it says it has no jurisdiction on foreign laws," he said.
Anna Hazare’s associate, activist lawyer Prashant Bhushan, said the white paper showed the government had not handled the issue seriously. "If the government was serious about curbing illicit money, they should have taken steps to absolutely stop non- transparent financial instruments like participatory notes. Also, the treaty with Mauritius that legalizes black money should have been changed," he said. Official data shows Mauritius accounted for 41.8% of total FDI inflows of $54,227 million into India between April 2000 and March 2011.
During the same period, Singapore accounted for $ 11,895 million, or 9.17%, of the total inflows. "Mauritius and Singapore with their small economies cannot be the sources of such huge investments," the white paper noted. "The ultimate beneficiaries/investors through the PN route can be Indians and the source of their investment may be black money generated by them," it added, raising credibility over two of the biggest sources of capital flows into India.
Experts said the problem was likely to be in foreign direct investment through the automatic route, but cautioned that future regulations to plug loopholes should be done in a manner so as not to hurt investor sentiment at a time markets are wobbly and the currency is under pressure. The government’s budget proposals for 2012-13, especially the General Anti-Avoidance Rules (GAAR), spooked the markets, forcing it to delay their implementation by a year.
"The problem largely lies in instances of FDI through the automatic route and the current reporting mechanisms may be modified to address this. But it should not create hurdles for genuine investors," said Akash Gupt, executive director at Price water house Coopers.
The white paper was mostly silent on the links between black money and political funding, which some experts have long cited as the source of corruption and generation of illicit funds. It said the government could consider a one-time amnesty or a gold scheme as viable means to catalyze voluntary disclosure and tax recovery. Citing successful implementation of such schemes by countries such as the US, UK, France and Germany, the paper said the government could explore partial benefit schemes that provide immunity from prosecution in lieu of voluntary disclosure along with payment of taxes, interest and penalty.
"In view of the increasing capacity of tax administration to access information from foreign jurisdiction… a similar scheme (amnesty) targeted at black money stashed abroad can be a one time option," the paper noted.
