Grey Shades of White


The white paper on black money presented by Finance Minister Pranab Mukherjee is little more than a homily on moral correctness

Paranjoy Guha Thakurta Independent Journalist

A laboured effort: Pranab Mukherjee has hinted that he would have liked to wait before presenting the paper
A laboured effort: Pranab Mukherjee has hinted that he would have liked to wait before presenting the paper, Photo: AFP

IT MAY sound funny, but is meant to be deadly serious. A White Paper on Black Money! Well, that is exactly what was tabled in Parliament on 21 May by Finance Minister Pranab Mukherjee. The document, running into just under 100 pages, prepared by the Central Board of direct Taxes in the department of Revenue in the Ministry of Finance, is significant — not for what it states, but what it does not.

The document goes into some length about how ‘black money’ should be defined, the various factors leading to its generation and the way accounts are manipulated by individuals, corporate entities and other organisations. It reproduces estimates made by various organisations about the size of India’s black economy, the quantum of money illegally stashed away outside the country and the ‘laundering’ or ‘white-washing’ of illicit money which returns to India. The role that various government institutions are supposed to play to curb the use and accumulation of illegal money is then outlined.

The white paper then describes the evolution of strategies to control black money — strategies that have clearly been less-than-effective; otherwise there would not have been any need for this report in the first place. There is considerable space devoted to strategies that are being adopted at a global level to curb illicit flow of funds through tax havens. But the prescriptions given in the section on “creating an appropriate legislative framework” to tackle black money are predictable and pedestrian, to say the least.

The foreword to the white paper is a giveaway. The finance minister acknowledges that the report was presented to comply with an assurance given in Parliament and that he “would have been happy” if he “could have included the conclusions of reports of three premier institutions that have been tasked to quantify the magnitude of black money”, reports which are likely to be received by the end of the year. The institutions include the National Institute of Public Finance and Policy that prepared a study on the black economy of India in 1985, which suggested that illegal income generation in India was not less than 18 percent of the country’s gross domestic product (GDP) — this finding was criticised by economists Suraj B Gupta and Arun Kumar, both of whom suggested that the proportion was much higher at around 40 percent.

What is conspicuous by their absence in the white paper are a set of estimates of the current size of India’s black economy. One could always argue that this is a matter of academic interest and that what is obviously far more important are the measures specified to contain the generation and use of money obtained through corrupt means. It is in this respect that the white paper is particularly weak and reveals no new ideas. It lists out standard strategies such as rationalisation of tax rates and reducing transaction costs of compliance and administration, while calling for reforms in sectors that are “vulnerable” such as real estate, gold and jewellery.

The paper also talks about how allocation of rights over minerals and other natural resources is a major source of corruption and predictably highlights the Vodafone case as an example of “misuse” of corporate structures — that are deliberately made complex and convoluted — to not just avoid but evade payment of taxes.

While the government document does mention how ‘participatory notes’ used in stock-exchange transactions by foreign institutional investors conceal the source of funds and provide a useful tool for money laundering, there is no recommendation calling for the banning of such financial instruments — which had been suggested in the past by the Reserve Bank of India. What has been suggested is that subscribers of participatory notes be subject to ‘know your customer’ norms.

Similarly, while the manner in which tax havens like Mauritius and Singapore are being used to route both direct and portfolio investments by foreign corporate entities has been delineated in detail, there are no suggestions for scrapping (if not doing away with certain key provisions) of the double taxation avoidance agreements with these two small countries. It is worth noting that Mauritius and Singapore together account for over half of the cumulative inflow of foreign investments in the country over the last decade or thereabouts.

The white paper talks of tax havens and participatory notes, but doesn’t offer any solution

Here’s what the paper states: “Mauritius and Singapore, with their small economies, cannot be the sources of such huge investments and it is apparent that the investments are routed through these jurisdictions for avoidance of taxes and/or for concealing the identities from the revenue authorities of the ultimate investors, many of whom could actually be Indian residents, who have invested in their own companies, through a process known as round-tripping.”

Significantly, the paper cites official statistics to indicate how money kept by Indians in infamous Swiss banks have come down drastically between 2006 and 2010 from Rs 23,373 crore to Rs 9,295 crore, but offers no explanation as to why this has happened. One reason could be — LK Advani may kindly note — that much of the money that was once kept in these Swiss banks have since returned to India after being laundered lilywhite.

The white paper lists the General Anti-Avoidance Rules (GAAR) as a means of reducing corruption in international financial transactions. This is all very fine but the fact is that the finance minister recently had to backtrack and postpone the implementation of these rules because of intense pressure from lobbies of foreign investors and those with vested interests in the continuance of existing corrupt systems.

The finance minister, in his foreword, pays lip service to the five pending bills — the Lokpal Bill, the Judicial Accountability Bill, the Whistleblowers Bill, the grievance Redressal Bill and the Public Procurement Bill, “which are at various stages of consideration by the Parliament”. When these bills will become law remains to be seen. More important, once enacted, whether these laws will thereafter be effectively implemented is another story.

THE BIGGEST omission in the white paper is that there is absolutely no mention whatsoever about the funding of political parties and the manner in which candidates raise funds and spend money before elections take place. The loopholes in the extant laws are not mentioned. The ugly nexus between business, politics and crime represents the fountainhead of corruption in India and until and unless this nexus is weakened, it will be futile to talk about reducing the black economy.

Pranab Mukherjee says the institutionalisation and expansion of information exchange networks at the international level is a “major step” in curbing cross-border flows of illicit wealth and in facilitating its repatriation. Well, if one is looking for names of bad guys in this report, there are none to be found. The minister claims that if India is to become “equitable, transparent and more efficient… there is much that we could do, both individually and collectively, to strengthen the moral fibre of our society”.

After that homily, the answers become crystal clear. We all have to now become good boys and girls quickly and take dips in the Ganga at Haridwar to wash away our sins. By then, India’s moral fibre will have become sufficiently strong for us to predict the imminent conclusion of kaliyug and the advent of a new dawn of Ram Rajya. If only life was as simple as that. If only there were not so many shades of grey between black and white.

Paranjoy Guha Thakurta is an Independent Journalist.


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