Seven sectors where one can expect Narendra Modi’s next ‘surgical strikes’ on black money
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The Narendra Modi government’s decision to scrap existing currency notes of Rs 500 and Rs 1,000 has led to much debate over its efficacy and implementation. Moreover, it has led to a political maelstrom that refuses to ebb anytime soon. That notwithstanding, the move certainly has brought to fore the issue of ‘black money’ or untaxed wealth, with many commentators saying that physical cash constitutes just one small portion of such wealth that has eluded the taxman’s scrutiny.

In the week following his announcement, Modi said that this was not the end of his government’s drive to get rid of black money and that the next major target could be so-called ‘benami’ properties - or properties acquired using untaxed wealth and are held in the name of one person, where the amount is paid by another person, often unrelated to the former. 

So, how much black money does India have?

The truth is, no one actually knows, primarily because, by definition, such wealth is hidden. Although there are no credible estimates on what portion of India’s Gross Domestic Product (GDP) remains untaxed, a 2010 World Bank estimate said that as of 2007, India’s ‘shadow economy’ was 23.2% of its GDP. Various other estimates since independence have estimated this figure to be between 4.8% and 48.1% at various points in time.    

Which sectors is India’s black money hidden in?

Again, there are varying assumptions on this. One of the more credible sources of information is a 2012 white paper on black money brought out by the Central Board of Direct Taxes (CBDT), which comes under India’s finance ministry. This white paper lists seven sectors (apart from cash itself), which it says are “vulnerable to generation of black money” and in which untaxed wealth is parked. These are:

Financial sector: The CBDT white paper says that this is the “most important sector in the economy when it comes to transfer of funds generated through whatever means into further productive activities.”  The white paper says that often black money enters the financial sector “as part of financial instruments or other processes, which at times involve money laundering thereby highlighting the potential of this sector in detection and prevention of black money along with its sources and perpetrators.”

Real estate: Real estate makes up a little over a tenth of India’s GDP and is therefore one of the single biggest sources of generation of black money in the country, as investment in property is a convenient way of parking untaxed wealth. A significant portion of real estate deals are either never reported or are under-reported, since property transaction taxes, commonly levied as stamp duty, are prohibitively high. “With tax rates of over 5% being imposed as stamp duty on buying of property, which otherwise also involves high transactions costs in terms of search, advertising, commissions, registration, and contingent costs related to title disputes and litigation, the property market remains one of the most inefficient asset markets in India. Unless the underlying distortions in this market are taken care of by appropriate reforms, it may be difficult to prevent such misuse,” the white paper surmises.

Bullion and Jewellery sector: Bullion and jewellery remains important for both generation and consumption of black money and is also targeted by black money holders looking towards protecting the value of their black money from inflationary depreciation. Moreover, a fairly large number of transactions in this sector remain totally unreported and therefore facilitate investment and consumption of black money.

Mining and allocation of rights over natural resources: The last decade has seen India grapple with various big-ticket scams involving the allocation of rights over natural resources including mines, forests, land, water, and spectrum. In the absence of a robust process of price discovery in these sectors, it remains a potential source of windfall gains for the allottees. To be sure, in the last few years, the government has tried to streamline processes of allocation and price discovery, especially after reports by the Comptroller and Auditor General led to scrapping of allocations of telecom spectrum and coal mines, but still a lot more remains to be done, especially when it comes to checking illegal encroachments and pilferages.

Equity trading: Although it has seen significant reforms, especially with dematerialisation, it remains vulnerable to cartel-based price manipulation and profiteering, proxy investments through conduits, and routing of investments through tax havens in case of foreign institutional investors. Moreover, ‘off market’ or ‘dabba trading’ transactions have not yet been completely curbed.

Misuse of corporate structure: Complex corporate structures are often misused to evade taxes.  Opaque structuring through creation of multiple entities that own each other and the secrecy granted by certain jurisdictions facilitate such misuse. What deters Indian tax authorities from taking action are cases where money is brought back to India through round tripping and other legitimate means.

Nonprofits and co-operatives: Such entities enjoy myriad fiscal and regulatory privileges under different laws. Their income is often treated differently for taxation purposes from that of privately owned profit-oriented entities. “This creates incentives for potential evaders to camouflage their concerns as non-profitable, charitable, or cooperative in nature. This can only be dealt with through a multi-pronged strategy of reducing the privileges available to them on one hand and subjecting them to a stricter regulatory regime on the other,” the white paper says. What however often deters strict enforcement is the fact that several such organisations are involved in genuine welfare activities and there is a broad government policy that such organisations need to be supported. This makes enforcement politically inexpedient.

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