One question which agitates many people’s minds is: “Can Black Money be eliminated?

”
The answer is very simple. “Can greed be eliminated?”
In other words, if greed can be eliminated, black money can be eliminated. As pe
r the Indian philosophy, this whole society (Samsar) is a product of Nature (May
a). Maya has two instruments (relevant to present subject): (i) Greed & (ii) Fea
r. Most people are greedy to achieve material wealth which does not belong to th
em. Hence most people are running towards temptations (a consequence of greed) a
nd away from fear. As long as there is Samsar, there will be people who do not w
ant to pay taxes, who want bribes and so on. Monetary result of all crimes will
be black money.
It is also said that: “The more greedy a person, the more fearful he is.” If this we
re true, it would be very simple to eliminate black money. Put the fear of law i
n the minds of tax evaders & you eliminate black money. Experience shows that th
e game played by Maya is not so simple. The highest authorities that are suppose
d to eliminate black money, them selves are greedy. Law has generally been prove
d to be ineffective against the authorities. And when the businessmen, bureaucra
ts & politicians form a cartel, hardly any thing can be done.
Is there any purpose of having discussion on attempts to eliminate black money?
While black money cannot be eliminated, it can certainly be regulated. And shoul
d be regulated. How to regulate black money is the issue we discuss in this pape
r.
I do not propose to discuss detailed income-tax sections and the complex technic
alities involved (except for one specific section on FIIs). Instead, I present h
ere some thoughts on black money.
Black money is not just money without payment of income tax. Black money can be
generated by bribe, theft and other serious crimes. Hence black money is present
even in the countries where there is no income-tax. A manufacturer may want to
avoid excise & sales tax. He would sell the goods in black and create black mone
y. School & college donations are an important reason for black money. When a st
udent gets admission by paying black money, the society has corrupted a young pe
rson even before he graduates. That student is most likely to consider black mon
ey as normal and essential part of the life.
Black money is universal. Indians do not have the monopoly of black money. I bel
ieve claims by media that: “the largest amount of black money in Switzerland belon
gs to Indians” are just innocent ignorance. Indian economy had been comparatively
small economy. It is only recently that in terms of purchasing power Indian econ
omy has become a large economy. So far the U.S. economy has been the largest. An
d the U.S. tax laws are far worse than the Indian tax laws. Considering the fact
that all human beings are equally susceptible to the forces of nature (greed),
it is a simple arithmetic that the black money owned by U.S. citizens should be
many times larger than the black money owned by Indians. Add to this black money
arising from the European countries, black money owned by Kings & Sheikhs and s
o on. Indian black money cannot be more than a small fraction of the global blac
k money.
So, black money is universal (geography) and forever (history) present. It is om
nipresent.
Black money is “Omnipotent”. Dawood Ibrahim could wage a war against India (in the y
ears 1992 & 1993) and cause tremendous losses to India by bribing several custom
s officers & others in India. Since black money is free from all taxes, sometime
s it is more powerful than white money.
Consider a simple illustration. Mr. H is an honest man. He pays full direct tax
on his income and pays full indirect taxes whenever he buys goods. He buys every
thing by insisting on receiving proper invoice.
Mr. E evades all taxes wherever possible.
Both of them want to purchase a refrigerator (fridge). For the manufacturer of f
ridges, the sales price is say, ` 10,000. When excise, sales tax & octroi are ad
ded, the retail price is ` 20,000. The manufacturer is ready to sell the fridge:
(i) with invoice after charging full taxes or (ii) without invoice and without
any taxes.
Mr. H will earn ` 30,000, pay a tax of ` 10,000 and purchase the fridge at a pri
ce of ` 20,000. In other words, he has to earn ` 30,000 to be able to buy the fr
idge.
Mr. E will earn only ` 10,000 and purchase the fridge in black without paying an
y direct or indirect taxes.
This illustration clearly shows how a tax evader has three times the financial p
ower as compared to an honest tax payer. There is a huge temptation for evading
taxation. Is it logical to expect ordinary mortals to be moral enough to avoid s
uch strong temptation!
Let us see some important developments which caused a black money economy in Ind
ia. Government of India’s responsibility: paragraphs 3 to 6 below. Tax Payers & Ta
x consultants’ responsibility: paragraphs 7 & 8 below.
Probable Solutions: paragraph 9 below.
Result: Paragraphs 9 & 10.
Future: Paragraph 11.
Does Government of India Cause Black money!
A History of High Tax Rates:
Consider the maximum marginal tax rates in the year 1974. Income-tax rate for wa
s 98%. Wealth-tax was 8% and estate duty was 80%. Let us use some arithmetic to
understand the economics.
Assume that Mr. H had a wealth of ` 10,00,000 and he was earning an income @ 15%
on his wealth. Thus he earned ` 1,50,000 per year in addition to his normal bus
iness incomes.
Now he would pay income-tax of ` 1,47,000 (@ 98%). He would pay wealth tax of `
80,000 (8% of wealth). Thus on a total income of ` 1,50,000 he would pay total d
irect tax of ` 2,27,000. If he had to remain honest, he would have to sell part
of his wealth every year just to pay the taxes. Presumably no honest tax payer w
ould have any substantial savings left. And yet the Government imagined that the
re will be people with large estate & imposed an estate duty @ 80%. GOI minister
s were really imaginative.
Consider a large industrial house in India. Chief promoter of the industrial hou
se held 1,00,000 shares in the company where market price was ` 100 per share. M
arket value of the shares was ` 1 crore.
On his death, the heirs would be liable to pay an estate duty of ` 80,00,000. Th
ere is no arithmetic error. 80% of the market value of estate was payable as dut
y.
Naturally no industrial house would have liquid assets to pay a tax which amount
s to 80% of their total estate. Hence the heirs would have to sell a significant
portion of their inheritance. When the family members of the industrial house c
ome forward to sell their shares in the market; the word spreads and the share p
rices crash. Let us assume that the price goes down from ` 100 per share to ` 60
per share.
Even if the heirs sold 100% of the inherited shares, they would get only ` 60,00
,000. This would be insufficient to pay the whole of the estate duty. It means t
he heirs would have to sell their personal assets to pay the full estate duty. W
ell, thankfully, there were provisions so that one would not pay more than what
he inherited.
Tax evasion was a compulsion in those times. Government was the cause. Only peop
le having incomes & wealth below taxable limits or irrational people paid full t
axes. India did have some irrational specimen. (Please see paragraph 9.1 below.
Today India has one of the best direct tax rate system.)
Absurd Laws:
FERA will go down in Indian history as a classic piece of absurd law. It went di
rectly against the business interests of the citizens. Result was, FERA was viol
ated by almost every one who had any thing to do with foreign exchange. Followin
g is a summary of long essays I have written earlier on the subject.
(i) Absurd FERA together with the facts that (ii) rupee was continuously depreci
ating (iii) and tax rates were usurious; made hawala (transfer of one’s savings ou
tside India) necessary to protect one’s wealth. Stiff customs duty rates with absu
rd import licensing made smuggling profitable. Gold Control Act which wanted to
prohibit Indian women’s natural desires, made gold smuggling profitable. All these
became complimentary to each other. We had a black money market larger than whi
te money market.
More serious was the issue that Indian wealth was running out & government of In
dia was begging before the “Aid India Consortium”. I submit for your consideration t
he statement that: “GOI was chief reason for black money & poverty in India”.
Thankfully, Dr. Man Mohan Singh (as Finance Minister) & Late Mr. Narsimha Rao (a
s Prime Minister) started a liberalisation process in India in the year 1991. Ou
r prosperity today (though limited) is due to the liberalisation.
Does Government abet tax avoidance!
In the current case going on in the Supreme Court of India on black money (the p
ublic interest litigation filed by Mr. Ram Jethmalani) Honourable Supreme Court
has asked Government of India to disclose the names of the people holding black
money abroad. As per media reports Finance Minister Mr. Pranab Mukherjee has sai
d that the Government cannot disclose the names of the people alleged to have bl
ack money in Swiss Banks. His reason is that the Double Tax Avoidance Agreement
(DTA) prohibits disclosure of information.
5.1 Extract of the relevant article from OECD Model is given below:
Article 26 (1) – The competent authorities of the Contracting States shall exchang
e such information as is forseeably relevant for carrying out the provisions of
this Convention or to the administration or enforcement of the domestic laws con
cerning taxes of every kind and description imposed on behalf of the Contracting
States, or of their political subdivisions or local authorities, insofar as the
taxation there under is not contrary to the Convention. The exchange of informa
tion is not restricted by Article 1 and 2.
Article 26 (2) – Any information received under paragraph 1 by a Contracting State
shall be treated as secret in the same manner as information obtained under the
domestic laws of that State and shall be disclosed only to persons or authoriti
es (including courts and administrative bodies) concerned with the assessment or
collection of, the enforcement or prosecution in respect of, the determination
of appeals in relation to the taxes referred to in paragraph 1, or the oversight
of the above, such persons or authorities shall use the information only for su
ch purposes. They may disclose the information in public court proceedings or in
judicial decisions.
{There is no typing error. Double Tax Avoidance Agreements (DTA) are written in
such a language that most people cannot understand them. I don’t think it is delib
erate.}
5.2 However, the agreement with the Swiss Government does provide that the infor
mation exchanged under DTA shall be maintained as secret information.
(i) OECD Model provides for the disclosure of information before the courts. (ii
) In the year 1994 when GOI executed DTA with Swiss Government, every one knew t
hat the Swiss banks store world black money & Swiss Government passes laws which
help Swiss banks. One wonders why the Indian Government did not insist on a cla
use similar to the OECD clause.
5.3 We have no Double Tax Avoidance Agreement (DTA) with Liechtenstein. Hence th
ere is no restriction on Government of India against disclosing information abou
t Liechtenstein information.
The German Government has offered information to any Government in the world whi
ch wants the information on tax evaders having money in tax haven banks. This in
formation is not under the DTA. It is freely available. Hence there cannot be an
y restriction against publication of the information. Yet GOI refused to take th
e information.
5.4 Azadi Bachao Andolan (ABA) is an NGO from Allahabad. It made a claim that In
dia – Mauritius DTA was abused by FIIs for avoiding huge amount of Indian income-t
ax. Delhi High Court agreed with ABA. At this stage Government of India went to
the Supreme Court appealing against the Delhi High Court decision. One would exp
ect a normal Government to be happy if tax avoidance through treaty shopping is
held to be invalid by the court of law. Instead, Government itself went to the S
upreme Court and claimed that India – Mauritius treaty is a valid treaty. Is it no
t a big surprise!
5.5 This Government goes on signing Double Tax Avoidance Agreements with several
tax havens. And then makes public noises against tax avoidance and treaty shopp
ing!!
5.6 A lot has been said in the media about Mr. Hasan Ali Khan and the allegation
s against him. Even more has been said about how Government of India appears to
be protecting him.
There has to be an incentive to pay tax. It is not that every citizen is dishone
st. Some people realise the value of having a good Government providing law & or
der and all other services.
There are so many people who make substantial donations. They do not expect any
personal benefit for themselves. If their money is used by the NGOs and if some
poor family benefit, the donors are happy. And yet these vary donors would not p
ay full tax. Why? They see their money being wasted in huge corruption and waste
ful expenditure by GOI. I submit, even today, GOI (which includes politicians) c
ontinues to be the chief reason for black money in India.
In the opening paragraph & paragraphs 1 & 2 we have seen the natural instincts w
hich cause black money. Paragraphs 3 to 6 expose Government’s responsibility for b
lack money. Now let us see our responsibility for black money: paragraphs 7 & 8.

Role of Private Sector in Black money:

Normal definition of black money is: “that money on which income-tax is not paid a
nd which is concealed”. Now this definition needs to be broadened.
I would say that wherever tax is due but not paid – whether by legal or illegal me
ans, it is black money. It may be concealed or it may be open. That does not cha
nge the fact that it is illicit money. In other words, there is no difference be
tween tax evasion & tax avoidance. Both bleed Indian economy.
If a farmer genuinely earns agricultural income and does not pay income-tax, his
income and wealth are white money. However, if an industrialist converts his bl
ack money by disclosing it as agricultural income, it is still black money. He m
ay be able to produce some paper work showing the income as his agricultural inc
ome. It does not mean anything. Since the papers do not tell reality, they are w
orthless. This is plain & simple money laundering. (Prevention of Money Launderi
ng Act does not cover black money as scheduled offence. Here I have used the ter
m “Money Laundering” in the more popular sense of the term.)
Similarly, aggressive tax planning is also Money Laundering. For example, treaty
shopping. Or use of tax havens. When the papers regarding tax haven companies (
Certificates of incorporation, residential status, claims for DTA relief etc.) m
ake a statement different from reality, in effect those papers are worthless.
Similarly, where an FII or an MNC does aggressive tax planning and avoids Indian
taxes, by using treaty shopping or tax havens, their income is also black (illi
cit) money.
Effective Rate of Tax (ERT):
8.1 It is very interesting to hear some professionals – especially those represent
ing FIIs and MNCs. They claim that a foreign investor or FII is concerned with “Ef
fective Rate of Tax” (ERT). For the investor Indian tax is a cost. They would like
to minimise the cost to zero.
If these institutions & companies having billions of dollars of turnover and ear
ning incomes in India do not pay tax then who is supposed to pay tax! It is one
thing that in USA, the Government taxes the middle class and gives reliefs & exe
mptions to the rich. We know the results of such an inverted system of social ju
stice. How can we in India adopt such absurdity!
8.2 However, our concern has no value. These FIIs are capable of making represen
tations before the PMO and get their exemptions. It is known to every tax profes
sional that today most of the FIIs do not pay any income-tax in India on one of
the two grounds: (i) “We have business income, no PE in India and hence no tax.” or
(ii) “We earn capital gains. We are investors from Mauritius or Singapore and henc
e under DTA no tax.”
8.3 Direct Taxes Code (DTC) was supposed to plug all kinds of tax avoidance. How
ever, as per the DTC II draft it appears that this wide scale tax avoidance may
continue even under DTC. As per the DTC provisions, incomes earned by FIIs will
be treated as capital gains. Hence the FIIs investing in India through Mauritius
or Singapore may escape the Indian tax even under DTC.
8.4 Treaty Override: DTC Section 314(141) (b) read with section 46 deem FII inco
me as capital gains. This provision is not protected under section 291 (9). Let
me elaborate. India has accepted the stand that: when there is a difference betw
een the provisions of DTA and Income-tax Act (ITA), which ever provision is more
beneficial to the assessee shall prevail. This position will continue under the
DTC. However, section 291(9) provides that the specific provisions listed under
the section will override the DTA. In other words, anti avoidance provisions li
ke GAAR & CFC will override DTA.
However, section 314(141)(b) is not included in this list of protected provision
s.
An FII investing in India directly from USA or UK can claim as under. It is earn
ing business income. FIIs have large volume of transactions and all conditions o
f business generally satisfy the stand that they have business income and not ju
st capital gains. Hence article 7 will apply. If they do not have a PE in India,
they are not liable to tax in India. DTC deeming provision shall not apply to F
II. The provisions of DTA shall override DTC. Their incomes from India will be t
ax free.
8.5 If Government of India wants, it can take following corrective actions regar
ding FIIs’ tax avoidance:
(i) Declare that treaty shopping will be clearly covered under GAAR provisions.
Hence any one investing in India through a tax haven will not get DTA relief. Th
is is of course an involved subject and detailed provisions have to be made.
Prima facie, treaty shopping is covered by GAAR. However, it is the discretion o
f Commissioner of Income-tax to hold it as an “Impermissible Avoidance Arrangement”.
DTC Section 123. This means, there can be litigation. And there can be some dec
isions where treaty shopping may be permitted. It is better for Government to cl
arify & announce the matter.
(ii) When an FII does business in India where they have any two or more of the f
ollowing in India: (a) Custodian (b) bank account (c) research organisation & (d
) broker; then it will be deemed that the FII is conducting business in India. T
his deeming provision would apply even if the FII does not have its own office/P
E in India.
Alternatively, it can be provided that when an FII buys & sells securities in In
dia, the share broker will be considered as a PE of the FII. He will be liable t
o pay tax for & on behalf of the FII.
One has to see whether Government of India is determined to act against tax avoi
dance or would just make public noise about tax avoidance and then succumb to th
e lobbies.
8.6 It is necessary for the Government of India to declare very clearly that: “The
effective rate of tax in India is 30%. If any one earns income in India, he is
expected to pay 30% tax except where the law specifically gives a relief. It wil
l not be accepted that a non-resident earns income in India and then does not pa
y any tax in India.”
Corrective Steps to reduce Black money (General):
Black money can be reduced if it is made (i) either less profitable than white m
oney, or (ii) by making it difficult to use black money. Let us see the steps ta
ken so far by Government of India (GOI) in both directions.
9.1 Black money can be reduced by making it less profitable.
Government of India has taken huge steps to make the black money less profitable
. From the earlier direct tax rates of 98% / 8% / 80%, the current position is t
hat: estate duty & gift tax are abolished. Wealth tax is reduced to 1% after sub
stantial concessions & exemptions. Income-tax rate is 30%.
Earlier black money was a compulsory and unavoidable part of the Indian economy.
Now if the businessman wants, (purely from tax point of view) he can pay the no
rmal taxes. In fact, today Indian tax rates are better than the rates prevailing
in USA, Germany & Japan. With the absence of estate duty in India, there is a h
uge relief for the tax payer. No one can expect a better rate mechanism in an in
dustrial country. (City countries like Hong Kong & Singapore are different. Oil
rich countries like Brunei & Abu Dhabi are different. They may have zero tax or
lower taxes.)
Such massive reduction of tax rates shows huge action by GOI. Have we, the citiz
ens responded! Well, experience shows that there are more sophisticated tax avoi
dance & tax evasion schemes in operation now. Some of us have not responded posi
tively. At the same time, GOI’s revenue has multiplied. There have been several ye
ars when GOI got more tax revenue than their budget estimates. Apart from the fa
ct that our increased GDP has boosted revenue, there remains a fact that more &
more people are now paying taxes more honestly.
Now when some people do not pay the tax, it is either a simple matter of greed o
r a compulsion because of Indian Government system.
9.2 GST & VAT:
My knowledge on indirect taxes is limited. However, I am told:
(i) Earlier system of all indirect taxes compelled people to avoid taxes. When t
ax rates are more than the profit margins, traders & manufacturers are bound to
evade/avoid taxes.
(ii) The new system of VAT has already given good results. More & more businessm
en are avoiding illicit trade & paying up indirect taxes. When GST will be intro
duced all over the country, there will be tremendous benefit for Indian economy.
9.3 Government has also taken steps for making the use of black money difficult.
All the avenues of spending substantial black money are under the eyes of surve
y department. Hence to some extent the black money use has been curbed.
9.4 There is now incentive for more & more people to bring back their black mone
y stored abroad. Rupee has stabilised. There are more chances that $ will go dow
n as compared to rupee. And Indian economy offers far better chances for growth
& profits than most markets in the world. All together, financial resources in I
ndia are increasing with substantial boost to the GDP.
Yet, life is like “Blow hot Blow cold”. (Idiom Definition from dictionary: “If you blo
w hot and cold on an idea, your attitude and opinion keeps changing; one minute
you are for it, the next you are against”.) This is what Maya does. She simultaneo
usly exhibits contrary trends.
Hopes belied:
Before the liberalisation started in the year 1991, Indian economy was extremely
regulated. Excessive regulation meant that if any one wanted to do anything in
India he had to bribe some one or the other. There were many individuals and ins
titutions that canvassed for deregulation or liberalisation of the Indian econom
y. All these people hoped that once the economy is liberalised, the cause for br
ibe & corruption would disappear. Hence there will be considerable reduction in
black money.
All these individuals’ and institutions’ hopes have been proved wrong. Corruption in
India has only multiplied. Late Mr. Rajiv Gandhi lost his elections because it
was alleged that in purchase of guns from Bofors, a bribe of ` 64 crores changed
hands. Today for the Indian politicians & businessmen, ` 64 crores is petty cas
h. Scandals are far bigger.
Drama of Maya is difficult to understand or predict.
Concluding Observations:
The US economy has fallen because greed has been institutionalised in USA. Is In
dia far behind? The series of scandals exposed in India and the frustration of t
he Honourable Supreme Court in bringing the corrupt to the books shows that gree
d is equally entrenched in India. Only the form is different. In India, Governme
nt itself is greedy. Is there any reason why India should not suffer a similar f
ate? I have two views:
(i) In USA greed has been institutionalised. The bankers who have caused the fin
ancial crisis are still getting huge bonuses. Government of USA has done preciou
s little to change the system. It is likely that US economy will deteriorate fur
ther.
(ii) Even in India, Government would not do anything except making noises and pa
ssing laws which are selectively implemented or not implemented. If the same att
itude continues, there is no reason why Indian economy should not crash.
However, in India democracy is dynamic. There are people who make noises. And th
ere are courts which listen to these noises and do their best to tame the Govern
ment.
I hope Indian democracy will succeed and the corrupt will be regulated. Mere hop
e will not do. More & more people will have to make noises and take appropriate
action. If this happens, we have a better future.
Thanks.
Rashmin C. Sanghvi

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