PICTURE SPEAK

"There is no question of harassment. We are targeting unaccounted wealth, not consumption. Honest taxpayers should have nothing to fear." P. CHIDAMBARAM, FINANCE MINISTER

This could make your heart beat faster. Last fortnight the Income Tax Department raided a pen mart favoured by high street fashionistas. The department was not so interested in the pen dealer's blooming business as in his client list. As it so happens, the dealer was made to part with a client list that could be the pride of many P3Ps. The names and addresses of all those who attended the shows by the mart, ordered pens-rather writing instruments-and, most interestingly, gave their pens for repairs are now with the Income Tax Department. As news of this leaked out many in 14 cities simply clutched their hearts, err their shirt pockets and glanced at the bloom tip.

A few days later the outlets of fancy watch dealerships in five-star hotels too were raided. This time too, the focus was not the evasion of the dealer but the consumption prowess of his clients. First out on the table are those who have had their watches repaired with the dealer. Next on the trip list were over a dozen shops selling hi-fi systems, plasma television sets worth over Rs 1.5 lakh and home theatre systems. The focus again was to acquire client lists, and since these systems require installation the dossier was handy. This was followed by a series of raids on the premises and outlets of a trendy modular kitchen manufacturer. The kitchen maker's dossier had a new angle-it enabled acquisition of a list of fashionable interior designers and obviously, their clients too.

MOOLAH MACHINES

IMPORTS: Importers routinely over-invoice imports by 10-20 per cent. Last year, India spent more than Rs 2,00,000 crore on non-oil imports. Rs 20,000 crore plus PUBLIC PROJECTS: Nearly 20 per cent of the cost of public projects finds its way into the parallel economy. Delays and cost escalations are evidence of this fact. Rs 60,000 crore plus HOUSING & SERVICES: Traders, professionals, builders, house owners, doctors and even teachers hide their income. Over 30 per cent of this sector is totally off the tax books. Rs 3,00,000 crore plus SUBSIDIES: India spends about Rs 1,15,825 crore on subsidies. Barely 15 paise of each rupee spent reaches the people and the rest finds its way into the black economy. Rs 50,000 crore plus INDUSTRIAL OUTPUT: Industry accounts for nearly a fourth of the GDP and experts believe that at least 10 per cent of the output is not reflected in the books. Rs 75,000 crore plus

The timing could not have been better. The economy is booming across sectors and the GDP has clocked 8 per cent growth. At shopping malls high fashion items are being bagged in a rush, consumer durables sales are at a record high and over a million cars and seven million bikes would have hit the road by the end of the year. Indians would have bought 1,000 tonnes of gold and diamonds worth Rs 6,000 crore. All this means the economy is flush with money. The stockmarket, gold prices and real-estate rates are all at a historic high. But the boom is not quite reflected in tax collections. National Council of Applied Economic Research studies reveal that the number of millionaires is growing by the day. Haryana alone has 482 crorepatis, beating Bangalore. Mobile phone ownership would touch 60 million and TV ownership nearly 100 million by the end of 2005. Yet the number of people with a declared annual income of over Rs 10 lakh is just 85,000, according to the Income Tax Department.

CATCHMENT AREAS: WHERE THE MONEY GOES Unaccounted income and wealth is not stashed under mattresses or hoarded in bank lockers. It is floating freely in the real economy. A look at some favourite haunts and themes.

FOREIGN RESERVES A study by the RBI in 1992 had put the total money stashed abroad at $180 billion (Rs 8,30,000 crore) Last week, the Government revealed that Rs 78,390 crore or nearly half the FII money came through PNs. The RBI believes that much of this is the money stashed abroad by resident Indians. Most of the money in foreign banks has been created through over-invoicing of imports by industry and trade. Some of this money is now being re-deployed into India, thanks to the emerging opportunities in the wake of the economic boom. GROUND ZERO Invest in land, for they do not make it anymore, said Mark Twain. Not surprisingly, investment in real estate is a favoured option. Land and farm houses work well for tax evaders because transactions are mostly in cash. The difference between the black and white components enables the investor to convert his wealth into assets. The flawed system helps operations. Government believes farmland is Rs 18 lakh per acre but around Gurgaon the minimum price is Rs 8 crore. Unlike investments in the financial markets, deals in real estate lend the much-needed anonymity that evaders need to keep out of the tax net. BENAMI INVESTMENTS Preferred businesses are those where cash flows are high Illicit cheque discounting facilitates two-way conversion of black money. The primary objective is to find avenues where conversion of black money into assets is easy. Construction companies, export houses, shopping malls and restaurants are among the chosen avenues. ALL THAT GLITTERS Indians are expected to buy nearly 1,000 tonnes of gold worth over Rs 49,500 crore and diamonds worth Rs 6,000 crore this year. Tax evaders love gold as it is stable in pricing and even delivers appreciation. Both gold and diamonds are easy to store and hide, and yet encashable. Investments in both add to the size of the black economy.

Clearly, the consumption in the economy and private expenditure are not in tune with the Government's direct tax collections, which even at the record estimate of Rs 1,75,000 crore are lower than the potential. So the Revenue Department has worked out a new strategy: instead of scouring for data on income profiles the sleuths are targeting expenditure and consumption profiles. Almost in tune, Finance Minister P. Chidambaram has unleashed a new campaign subtly targeting both the heart and purse strings. A week before Diwali, Chidambaram encouraged people to spend and grow the economy but also urged them to ensure they had paid their taxes. It is not just a hunch that the department is working on. In the past six months the Revenue Department and its advisers have waded through data on both consumption and output and they realise that a large part of the economy is out of the tax bracket. At least they seem to be out of the banking network.

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