The background
It is during the election that often there is some burning issue brought by the political parties. The promise to bring back wealth stashed in Swiss banks by Indians was the issue that was brought by the opposition parties in this election. With personal account deposit bank of $1500bn in foreign reserve which have been misappropriated, an amount 13 times larger than the country's foreign debt, one needs to rethink if India is a poor country.
Ordinary Indians may not be exactly aware of how such secret accounts operate and what are the rules and regulations that go on to govern such tax havens. However, one may well be aware of ?Swiss bank accounts,? the shorthand for murky dealings, secrecy and of course pilferage from developing countries into rich developed ones.
What is Black Money?
Usually untraceable, and hence untaxable, business dealings that are not reflected in a country's gross domestic product (GDP) computations. An integral part of most third-world and many first-world economies, it is cash based system in which transaction records are kept in secret account books (called 'number two' accounts). Though it employs illegal (and even criminal) methods, it is a survival practice in repressive tax regimens or where legitimate expression of entrepreneurial activity is made unnecessarily difficult by a maze of regulations. Black economy and black money go hand in hand. Also called parallel economy, shadow economy, or underground economy.
Thus, all that money which is unaccounted or what we also call as a black money is termed as parallel economy as they don't constitute to the GDP growth of thecountry. The growth of the parallel economy is distorting the formal economy.
Swiss Banks
Banking in Switzerland is characterised by stability, privacy and protection of clients' assets and information. The country's tradition of bank secrecy, which dates to the middle Ages, was first codified in a 1934 law. All banks in Switzerland are regulated by Swiss Financial Market Supervisory Authority (FINMA), which derives its authority from a series of federal statutes.
Swiss neutrality and national sovereignty, long recognized by foreign nations, have fostered a stable environment in which the banking sector was able to develop and thrive. Switzerland has maintained neutrality through both World Wars, is not a member of the European Union, and was not even a member of the United Nations until 2002.
Currently an estimated one-third of all funds held outside their country of origin (sometimes called "offshore" funds) are kept in Switzerland. In 2001 Swiss banks managed US$ ?2.6 trillion. By 2007 this figure has risen to roughly 6.7 trillion Swiss francs (US$5.7 trillion).
The Swiss Parliament passed the Banking Law of 1934, which codified the rules of secrecy and criminalizes violation of it. Swiss banks, as well as the post office (which handles some financial transactions use an electronic payments system known as Swiss Interbank Clearing (SIC). The system is supervised by the Swiss National Bank and is operated via a joint venture. SIC handled over 250 million transactions in 2005, with a turnover value of 41 trillion Swiss francs.
As of 2006, there were 408 authorized banks and securities dealers in Switzerland, ranging from the "Two Big Banks" down to small banks serving the needs of a single community or a few special clients.
UBS AG and Credit Suisse are respectively the largest and second largest Swiss banks and account for over 50% of all deposits in Switzerland; each has extensive branch networks throughout the country and most international centres.
Due to their size and complexity, UBS and Credit Suisse are subject to an extra degree of supervision from the Federal Banking Commission.
Size of the Parallel economy in India
The scandalous and corrupt have deposited in foreign banks in their illegal personal accounts a sum of about $ 1500 billion, which have been misappropriated by them. This amount is about 13 times larger than the country?s foreign debt. This huge amount has been appropriated from the people of India by exploiting and betraying them. What is even more depressing in that this ill-gotten wealth of ours has been stashed away abroad into secret bank accounts located in some of the world?s best known tax havens. And to that extent the Indian economy has been stripped of its wealth.
Transparency International, which publishes a Corruption Perception Index, covering 146 countries, places India at rank 91. Some Rs. 21,000 crore annually is estimated to exchange hands in the form of bribery in the country, which indicates the extent of the problem.
The amount is astronomical and mind-boggling and, as reported, is adequate enough to provide safe drinking water in all villages and towns and also to relieve the farmers and landless labourers of all debts due to banks and institutions.
Reasons
One of the key reasons for the expansion of parallel economy is the Indian policy, i.e. the problem is very Indian. The money in the Swiss banks, or other tax havens, is the product of the Indian system. Inspector-control raj, liberalisation without regulation and crony capitalism masquerading as private-public-partnership combine to keep alive a parallel economy estimated to be 30 per cent of the trillion-dollar GDP.
Black money is being created at every level of the Indian economy. Every rule has the potential of becoming a meal ticket. Public sector projects are routinely delayed and cost more. Barely 10 per cent of the money spent on alleviating poverty reaches the poor. There is no fear because no one barring Harshad Mehta has been convicted since the 1987 Bofors scam.
Obviously the patronage is not without a price or political protection. Nor is it all old fashioned cash or even benami. Politicians are now known to get companies or contractors to pay up innovatively by investing in different business channels. Kickbacks could also travel abroad through importers and come back as investment into the stock market or equity in an infrastructure project via Mauritius. Thus there is a continuous surge in the money, unrecorded and untaxed, circulating in the economy.
The black economy or black money comprises tax evaded income and illegal money. This tax evaded income relates to both direct and indirect taxes; direct tax means income tax, corporate tax, capital gains tax; whereas indirect tax means tax on commodities or services. The big crimes such as organised crime, terrorism, drug trafficking, bribery/corruption, international economic crime and smuggling also contribute a major chunk to the black money component in the economy.
The issues and its impact
The issues
It is important to examine as to how such a large black economy operates; it operates like any other economy in the sense that it also produces goods and services. Since the magnitude of this black economy is so large, there is also a lot of overlap between black and white money, in the sense that white money gets converted to black money and vice versa. It is interesting to see that economists also find this black money beneficial as well as harmful to the economy. On the beneficial side it is argued that it leads to economic growth by stimulating consumption.
Some of the recent developments in the economic field have also influenced the movement of black money. With economic liberalisation, a low interest regime, both in the lending and saving sector is now in existence; because of this bank deposits are no longer an attractive savings instrument. Money now has tendency to move towards real estate and capital markets because of the phenomenal gains that both sectors are now fetching. More investments are now flowing into real estate because these investments are simpler and less complicated than the capital markets.
During the earlier times, the key factors associated with black money are illegal business, tax evasion, and the hard-core criminal-politician nexus. But today, almost all sectors of the economy generate some black money. In some industries such as coal, liquor and real estate, the problem is endemic According to experts, a large proportion of black money is also generated in the services and tertiary sectors. As this portion of India?s GDP grows, black money is also growing in. Thus, it is now an endemic part of the system. A large per cent of the black money in India now goes abroad through hawala channels. According to one view, the political parties also "routinely" transfer money overseas and bring it back during elections. Thus such a nexus between politicians, bureaucrats and businessmen ensures that the black economy thrives.
Impact
So the issue is so entangled with the very nerves of economy and society, it needs a lot of conviction, patience and tact to sort out. But we cannot afford to be complacent, since the harmful effects of black money are so pernicious that it becomes very difficult to justify it.
The major and immediate threats according to economists are:
- It leads to the wrong measurement of the size of the economy and thereby misleading the level of economic activity. Thus it poses a challenge to macroeconomic policy makers.
- It diverts the scarce resources into non-priority areas
- By creating a parallel economy through illegal activity, it poses a very serious threat to legitimate commercial activity
- Encourages capital flight
- It also erodes confidence in the government if the tax evasion is massive.
Thus, Black money is used in several ways. It is used to bribe regulators and law enforcement; this is done mainly to overcome control related delays and multiple layers of bureaucracy. Black money is also used for conspicuous consumption especially of luxury items and foreign goods; this in turn can lead to not only less desirable production, but also smuggling of goods. Black money which has been saved is also held as deposit in foreign banks, as gold/diamond etc, as liquid currency, as investment in real estate, as investment in businesses and also to build up inventories; all these factors lead to generation of more black money which according to some grows at a compound rate which is much faster than the rate of growth in normal economic activity. Black money can be moved around either openly or in a clandestine manner through underground bankers. Gold shops which are also fronts for underground bankers are also used to move black money. Several other ingenious ways exist for circulation of black money;
Failure to raise enough resources (to which the black economy contributed) also increased the revenue deficit in the 1980s, raised the fiscal deficit, forced the government to borrow more, and raised interest rates. This, in turn, forced India to borrow even more, leading to the debt trap in which the country finds itself today (where most of its borrowing is towards payment of interest and not the principal).
Solutions
In the past, many honest bureaucrats and officials made an effort to curb this menace and went for a tougher crackdown. Many committees and commissions have come out with hundreds of recommendations on ways to curb the black economy. But they?ve got nowhere. There is no political will to tackle this issue and no single agency responsible for it, so it?s easy to sidestep it. All investigation and detection ended with no result. The government has no effective instruments to mop up black money,
The nation bears the morally cumbersome burden of learning to live with the fact that no real attempts are being made to curb black money. According to experts the probable solutions are
- Move gradually away from a cash economy.
- Effective enforcement should be resorted to in an extensive manner to curb the black money.
- Successful pursuit of investigations of secret accounts in tax havens like those in Swiss banks
- Successful investigation of cases relating to electoral expenditure of candidates in excess of the ceiling.
- Concept of presumptive tax
- Demonetisation and amnesty schemes
- Expanding Value added tax (VAT) net
Lower taxes, by and large, beget better compliance. Also, systems of controls that still exist need to be removed. For most rational operators, the risk of being caught on the wrong side of the law is not worth taking beyond a certain point. The job of governance is to make realistic estimates of what precisely these limits are, and then ensure that people are induced to work within the proper framework of law.
Prof. M.Guruprasad
AICAR Business School
[email protected]
Source : Indiainfoline