India’s Black Money (White paper, May 2012 Fin. Minister)

Pranabda has presented a White Paper on India’s Black Money. This is a tacit acceptance of the enormity of the loot that has taken place from India, post-independence. The loot far exceeds the colonial loot.

Facilitating instruments in this accumulation of the loot and flight of monies out of the country have been noted.

What is absent is admission of the enormity of the problem by claiming using suggestio falsi and suppressio veri approaches, that India is only 15th in the rank of counties with illicit flows. While China is ranked No. 1 with 2467 US Dollar billion, India is said to account for only 104 US Dollar billion. This ranking method of GFI endorsed by Pranabda is NO consolation whatsoever.

China is a totalitarian state run by a totalitarian party while India is said to be run by nationalists proud of the independence they have achieved from colonial rule. Whether it is 104 USD Billion or 1040 USD Billion, Indian Government owes it to the poor people of India that restititution of all illicit wealth will be ensured.

There is no mention that the illicit wealth held abroad will be nationalised, a proposal suggested by Senior Advocate Fali Nariman when he was Rajya Sabha member and also by Action Committee Against Corruption in India headed by Dr. Subramanian Swamy. Such a nationalisation on the lines of the Bank Nationalisation is a legitimate step and should be immediately put in place.

There is little realisation in the White Paper that investigation and justice systems in India grind slowly, very slowly. There is little admission that the illicit loot is from external sources such as 1) the one recorded for the late PM Rajiv Gandhi from Russia and recorded to have been held in a Swiss Bank Account; and 2) BOFORs scam money which is still lying unrestituted despite the ITAT decision of 31 Dec. 2010.

While the White Paper is a step in focussing attention of Parliamentarians on the serious issue of Black Money, a lot of work has to be done by Parliamentarians to direct the Executive of the State to act more vigorously to track down the culprits and punish them however high the offices they hold or relations they cherish, as politially exposed persons, but to get the money back into the Consolidated Fund of India.

What happened to Col Gadhafi or Pres. Mubarak or Pres. Marcos should happen to such Indian crooks and criminals who have generated black money and stashed away a big chunk of the nation’s wealth in tax havens abroad.


Some excerpts of the White Paper follow the full text.

Some snippets:

2.6.4…The Swiss Ministry of External Affairs confirmed these figures when a reference was made by the Indian Ministry of External Affairs to them. Since the information was publicly available on the website of the Swiss National Bank, the figures of earlier years were also taken and are tabulated in Annexure Table 1. From this Table, it can be seen that bank deposits of Indians in Swiss banks have
decreased from ` 23,373 crore in year 2006 to ` 9,295 crore in year 2010…2.6.6 These figures are the only authentic information available at this stage about Indian money lying in foreign banks. From these figures, it can be safely concluded that the common belief that Indians hold the maximum deposits in Swiss banks is not correct. (Page 14).

2.7.7 By not considering illicit inflows even if the reasons given are valid, it is apparent that the estimate given in GFI’s November 2010 report of a total of US$ 213.2 billion being shifted out of India from 1948 to 2008 appears to be on a higher side…2.7.10 It is therefore reasonable to suggest that although the estimates of illicit outflows outside India made by the IMF and GFI gives useful insights, they are incomplete and further studies are required to get a correct estimate. (Pages 16-17).

2.8.6 2.8.6 While GFI recognizes in its various reports that the outward transfers of illicit capital could come back to a country through ‘round tripping’, it has not taken the same into consideration in view of the practical difficulty of doing so. However, the foregoing examples do suggest that a large part of the illicit flows from India may have returned. They also highlight urgent need of proper investigations by the International Taxation Division, strengthening of the legislative framework consisting of double taxation avoidance agreements (DTAAs) and tax information exchange agreements (TIEAs), and streamlining of exchange of information from various jurisdictions, including OFCs. (Page 18)

2.9.3 The Vodafone tax case provides an instance of the misuse of corporate structure for avoiding the payment of taxes. In this case, the Hutchison Group had made investments in India from 1992 to 2006 through a number of subsidiaries having ‘separate corporate personality’ but which were essentially post box companies based in the Cayman Islands, British Virgin Islands, and Mauritius. The Hutchison Group sold its entire business operation in India in February 2007 to the Vodafone Group for a total consideration of US$ 11.2 billion and the same was effected through transfer of a solitary share of a Cayman Islands company. When the tax authorities requested the accounts of the said company, the answer given was that as per Cayman Islands law, the company was not required to prepare its accounts.
2.9.4 With increasing realisation about the harmful effect of ownership being concealed behind complicated corporate ownership structure, such structure is coming under scrutiny. In the Indian context, it is one of the reasons for the fact that tax authorities are not able to take action in cases where money is prima facie brought back to India through round tripping and other legitimate means and it is expected that efforts taken by India in this regard as also global pressure will provide a check on these tendencies. (Page 18).

2.10.2 The issue of generation of black money and its illicit transfer abroad has gained prominence in the last two years due to the resolve of world leaders, including Indian leaders, to address it effectively. Some of the widely circulated figures about black money of Indians stashed abroad have been, as discussed
earlier, baseless exaggerations and there is strong likelihood that substantial amount of such money transferred abroad illicitly might have returned to India through illicit means. Thus a multi-pronged strategy, including joining the global crusade against black money, creating an appropriate legislative framework, setting up institutions for dealing with illicit money, developing systems for implementation, and imparting skills for effective action, is required to deal with the issue of generation of black money and its illicit transfer outside the country, and for bringing it back to India. This will be subsequently discussed in this document. (Page 19).

D. Financial Action Task Force
4.2.11 India, having met the strict evaluation norms of the FATF, was granted full-fledged membership (34th Member) in June 2010. Further, in recognition of India’s efforts in this regard, the Asia Pacific Group (APG) on Money Laundering and Terrorist Funding chose India as Co-chair of the Group at its annual meeting in Singapore in July 2010. For furtherance of the objectives of joining the global efforts against money laundering and bolstering the national programme, India successfully hosted the annual meeting of the APG between 18 and 22 July 2011 at Kochi, Kerala. India is fully committed to following the FATF norms of KYC and customer due diligence, illegal transfer of funds and their recovery, and international cooperation. E. United Nations Convention Against Corruption
4.2.12 On 9 May, 2011 India became the 152nd country to ratify the United Nations Convention against Corruption, which was signed on 9 December 2005. The purposes of this Convention are: (a) to promote and strengthen measures for preventing and combating corruption more efficiently and effectively; (b) to
promote, facilitate, and support international cooperation and technical assistance in the prevention of and fight against corruption including in asset recovery; (c) to promote integrity, accountability measures, and the criminalisation of the most prevalent forms of corruption in both public and private sectors. (Page 30).

C. Prevention of Money Laundering Act 4.3.17 To strengthen the provisions of the PMLA, amendments were carried out in 2009. These amendments have introduced new definitions to clarify and strengthen the Act and strengthened provisions related to attachment of property involved in money laundering and its seizure and confiscation. More offences have been added in Parts A and B of the Schedule to the Act, including those pertaining to insider trading and market manipulation as well as smuggling of antiques, terrorism funding, human trafficking other than prostitution, and a wider range of environmental crimes. A new category of offences with cross-border implications has been introduced as Part C. (Page 35).

C. Action by the Investigation Wing
4.7.12 In search and seizure action under section 132 of Income Tax Act, the Investigation Wing of the CBDT has detected concealed income of ` 19,938 crore in the last two financial years. Focused searches have been conducted in a number of cases in the current year on the basis of information received from foreign jurisdictions under the provisions of DTAA. Search and seizure statistics for the last few years are given in Table 4.3.

Table 4.3 Search and Seizure Statistics 2006-2012
Financial No. of VALUE OF ASSETS SEIZED (In ` Crore) Total Undisclosed
Year Warrants Income Admitted Executed (In ` Crore)

(Cash, Jewellery, Other assets) Total seized (Rs. Crore):
2006-07 3,612.89
2007-2008 4,160.58
2008-2009 4,613.06
2009-2010 8,101.35
2010-2011 10,649.16
2011-2012 9,289.43 (page 47).

B.5 Mining and Allocation of Property Rights over Natural Resources
5.2.28 Natural Resources including mines, forests, land, water, and spectrums belong to the country as a
whole, but their efficient allocation and utilization demands that government assigns property rights to private parties in lieu of financial payments made to the public exchequer. This process calls for significant improvement in transparency and public accountability and appropriate price discovery mechanisms, in the absence of which these sectors can become vulnerable to illegal encroachments, while their allocation at highly subsidised rates can lead to windfall gains for the allottees. There is therefore need for comprehensive reforms requiring coordination and consensus among states and the centre. 5.2.29 In order to ensure transparent and efficient allocation of natural and man-made resources, oversight in the form of comprehensive regulations, independent regulator, and appointment of ombudsmen for grievance redressal, particularly for scarce resources – as in land, minerals, and forests – can be considered as a remedy. (Page 56).

C.7 International Taxation and Transfer Pricing 5.2.61 International taxation and transfer pricing are new focus areas both to check the menace of black money and for augmentation of tax collection. By shedding some light upon the dark side of international taxation and transfer pricing in the previous chapter, we have stimulated a closer and more critical consideration of the ramifications of transfer pricing and international taxation practices and thereby highlighted the need to make their administration more effective. The Government has already introduced the Advance Pricing Agreement (APA) in the financial year 2012-13. The APA is an instrument through which the arms’ length price of an international transaction will be determined in advance. This will not only ensure avoidance of trade mispricing but will also ensure that there is tax certainty for the MNEs located in India or doing business with India. There is also need to step up research into multi-layered cross-border transactions and ever-changing transfer-pricing manipulations to prevent considerable opportunities for capital flight, tax avoidance, and generation and transfer of black money. (Page 61)

B. Voluntary Disclosure Schemes and Tax Recovery
5.4.7 One of the options suggested for bringing back black money stashed overseas is scheme for voluntary disclosure of such deposits. This option has been successfully adopted by some countries (USA, UK, France, Germany, etc.). In these schemes, only partial benefits in the form of immunity from prosecution
were made available in lieu of voluntary disclosure, as taxes along with lumpsum interest and penalty has to be paid. In the past, India has also opted for voluntary disclosure schemes. A similar scheme, targeted at black money stashed abroad can be a one time option, in view of the increasing capacity of tax administration to access information from foreign jurisdiction. However, these schemes have also been criticized for creating future expectations of similar schemes and resultant moral hazard. In recent years, the general public sentiment is also perceived to be against giving any immunity to tax evaders who have parked their money outside India. While such schemes help in recovering some of the lost tax revenue,
their overall feasibility needs to be assessed in this background. 5.4.8 A gold deposit scheme has also been suggested from some quarters in this regard which essentially provides that if the depositors part with gold now, they will get it back as gold. This may also carry a nominal rate of return and should be transferable so as to be used as collateral for sale. The most important part of the scheme is that there should be complete tax immunity if the holders come forward to make the deposit and the depositors ought not to be asked where they get the gold from. However, the issue of complete tax immunity needs to be examined in light of other policy objectives.(Page 67).

Annexure 3 : Recommendations of the Committee Headed by Chairman, CBDT on
Black Money

C. Effective detection of black money
6.17 The regulation and enforcement of KYC norms in the co-operative sector may be strengthened by the State Governments as well as the Central Government. Responsibility may be fixed for any lapse in this regard, as well as for any subsequent failure to alert authorities as regards any suspicious transactions in such accounts. 6.18 The RBI could consider stricter implementation of KYC norms and limit number of accounts that can be introduced by a single person, the number of accounts that can be maintained in the same branch by any entity and alerts about same address being used for opening accounts in different names. Stricter adherence to, and enforcement of, KYC norms is needed for ensuring proper compliance by banks and financial institutions. The Government, as well as the RBI, also need to put a better regulatory framework in place and act promptly against errant persons / institutions. 6.19 The Ministry of Corporate Affairs, which already has a centralized data-base of all companies, may examine placing a cap on the number of companies operating from the same premises and number of companies in which a person can become director. 6.20 The government may consider introducing alternative financial instruments to reduce the attraction
of gold as savings instrument. It may also consider revising customs duties, as also graded wealth tax, on gold and jewellery to discourage investments in unproductive assets. The taxation structure on bullion and jewellery, including VAT / Sales Tax should be harmonized.(Page 76).

6.24 Foreign remittances using corporate structures and the formal financial sector instruments may be a popular method of transferring funds (even of illegal origin) to foreign jurisdictions or for routing back to India through Foreign Institutional Investment (FII). There is a need to create a robust database of such remittances and carry out an analysis of their backward and forward linkages in order to understand the nature and legitimacy of the transmitted funds. FIU-IND may be empowered by law to receive reports (similar to other reports submitted to FIU-IND) on all international fund-transfers through the Indian financial system. The FIUs of Australia and Canada are already mandated to receive such reports. (Page 77)

6.30 Institutions of the Lok Pal and Lokayukta may be put in place at the earliest, in the centre and states, respectively, to expedite investigations into cases of corruption and bring the guilty to justice. (Page 78).

Annex Table 3 : lllicit Flow, GFI Report, December, 2011
Rank Country Illicit outflow
(billions of USD)
1 China 2,467
2 Mexico 453
3 Russia 427
4 Saudi Arabia 366
5 Malaysia 338
6 Kuwait 269
7 United Arab Emirates 262
8 Venezuela, BR 171
9 Qatar 170
10 Poland 160
11 Nigeria 158
12 Kazakhstan 123
13 Philippines 121
14 Indonesia 119
15 India 104
16 Ukraine 92
17 Chile 84
18 Argentina 83
19 Islamic Republic of Iran 66
20 Egypt 60

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