The curse of black money is not new to India. It has been a bane since the birth of the republic in 1951 when the first voluntary disclosure scheme was announced. Since then several studies have looked at the phenomenon and come up with varying estimates-from a moderate 5.1 per cent of the GDP to over half the economy. Indeed, as early as in 1983 a National Institute of Public Finance and Policy study led by Shankar Acharya had put the figure at over 20 per cent of the GDP. Another study by Arvind Virmani had deduced that 74 per cent of those liable to tax were outside the tax net. Arun Kumar, a professor at JNU, Delhi, looked at all the studies and came up with his own deduction: 40 per cent of the GDP (inclusive of illegal activities) was outside the tax net. Vijay Kelkar, former adviser to the Ministry of Finance, says that following the reforms and liberalisation, the ratio of black to white in the economy must have come down.

PICTURE SPEAK

THE BLACK BAZAAR: A large part of unaccounted wealth is spent on big brands at metropolitan malls

Revenue officials in the Finance Ministry, however, believe otherwise. They argue that despite several amendments in the law, cuts in maximum tax rate from a high of 97.5 per cent in 1975 to 33 per cent now, attempts to lure black money back through amnesty schemes and the proverbial stick, the unaccounted segment of the economy has only grown-both in proportion and in absolute numbers-from an estimated Rs 36,786 crore in 1983 to over Rs 9,00,000 crore. Indira Rajaraman, economist with the National Institute of Public Finance and Policy, agrees and points out that despite liberalisation, dismantling of the licence-permit raj and the slashing of taxes, the ratio of taxes to GDP has not grown as expected. Her study Fiscal Developments and Outlook in India reveals that the tax-GDP ratio was at its peak at 15.98 in 1990 and has only fallen since till last year when taxes collected by the Centre and states touched 15.04 per cent. She says we have failed to tap incomes and transactions fully. Her contention is that flood of luxury goods dealers setting shop in India is proof of an income level not reflected in revenue collections. Rajaraman says, "India's tax-GDP ratio could easily be ramped up by 5 per cent. Translated, the black economy could amount to 50 per cent of the reported GDP." This explains the acute lack of infrastructure and poor spend on social sectors.

DISCLOSE ENCOUNTERS In almost every decade, the Government of India found reasons to bring undisclosed income and wealth into the mainstream

1951 Voluntary Disclosure Scheme Income declared: Rs 70.20 crore Tax collected: Rs 10.89 crore 1965 Voluntary Disclosure Scheme-I Income declared: Rs 52.18 crore Tax collected: Rs 30.8 crore 1965 II Voluntary Disclosure Scheme-II Income declared: Rs 145 crore Tax collected: Rs 19.45 crore 1975 Voluntary Disclosure of Income Act Income declared: Rs 746.07 crore Tax collected: Rs 249 crore 1975 Voluntary Disclosure of Wealth Act Wealth declared: Rs 844.72 crore Tax collected: Rs 7.70 crore 1985 Finance Act Income declared: Rs 2,840.37 crore Tax collected: Rs 388.03 crore 1985 Finance Act Wealth declared: Rs 7,837.97 crore Tax collected: Rs 70.76 crore 1997 Voluntary Disclosure of Income Scheme Income declared: Rs 33,289.67 crore Tax collected: Rs 9,745.52 crore PLUS: In 1981 the government came out with a special Bearer Bonds (Immunities & Exemptions) Act of 1981, allowing evaders to invest at a nominal interest. On maturity proceeds enter books with no questions asked. Money collected: Rs 400 crore Tax paid: Rs 160 crore 1978 Demonetisation of currency notes of Rs 1,000, Rs 5,000 and Rs 10,000 worth Rs 160 crore. Black money trapped: Rs 70 crore

PICTURE SPEAK

CHORI CHORI: The film industry is largely funded by the black economy

Significantly, the growth of the underground economy is not in the primary and secondary sectors (agriculture and industry) but in the tertiary services sector. As this segment forms the major chunk of the GDP and has led the growth, the black economy has naturally expanded. Even back-of-envelope calculations show that the size of the black economy is well over 40 per cent. Consider this: the services sector accounts for 51 per cent of the economy. Simply put it delivers half of the nearly Rs 30,00,000 crore GDP. Let's subtract the public sector and you are left with 35 per cent of the GDP. Perhaps many companies are under the threshold level of Rs 4 lakh turnover, which leaves you with 25 per cent of the GDP or roughly Rs 7,50,000 crore. Sure financial services are not subject to service tax world over, so even if you take that part out theoretically this segment should yield Rs 60,000 crore of service tax at the rate of 10 per cent. But the actual service tax collections are just Rs 20,000 crore. It would seem that two in three people in this sector are outside the tax net and that unaccounted-for income could be as high as Rs 3,00,000 crore.

AN OLD ACCOUNT The quest to estimate the extent and magnitude of the black economy is as old as the republic. Since Justice Wanchoo in 1971 several committees and persons have spent time and energy on this.

Justice K.N. Wanchoo (1971) Direct Taxes Enquiry Committee Report 5.1% of GNP at market price P. Gupta and S. Gupta (1982) Estimates of the Unreported Economy in India 48.1% of GNP at market price D.K. Rangnekar (1982) Size and Dimension of the Black Economy 14.4% of GNP at market price Gupta and Mehta (1981) An Estimate of Under-Reported National Income 19.8% of GDP at factor cost O.P. Chopra (1982) Unaccounted Income: Some Estimates 10.2% of GNP at market price Ghosh, Bagchi, Rastogi and Chaturvedi (1981) Capital Formation, Growth of Domestic Product and Capital Output Rations 8.7% of GNP at market price Shankar N. Acharya (1983) Aspects of the Black Economy in India 20% of GDP Arun Kumar (1996) The Black Economy In India 40% of GDP Sumana Chattopadhyay, Kausik Chaudhuri and Freidrich Schneider (2002) The Size and Development of Shadow Economy in India and other Asian Countries 23% of GDP in 1997-98

In fact, it is this segment consisting of builders, traders, lawyers, doctors, restaurateurs and other self-employed professionals which is said to be in the first list of the department. Taking the argument further, tax officials deduce that it is not just service tax that they are losing. They estimate that a huge chunk of income generated in this segment is also outside the tax net or is understated. Nobody is hazarding an accurate number but guesstimates reveal that direct tax evasion in the services sector could be over Rs 1,00,000 crore. Of course, the caveat is that much of these deductions are based on reverse calculations of GDP figures.

SHADY BUSINESS Cash to stay in power comes from transfers, siphoning off funds from public projects and plain old scams POLL POWER It is estimated that candidates of major parties across 542 Lok Sabha constituencies spend over Rs 10,000 crore, averaging Rs 5 crore per candidate per constituency. Add the cost of elections to 4,120 assembly constituencies for the total bill. Rs 20,000 crore plus TRANSFERS INC Transfers is an industry. There is no clear estimate of how many transfers take place across the country but both politicians and babus are equal partners in the racket. Rs 10,000 crore plus SCAM COUNTRY Since Bofors in 1987, the country has seen a dozen major scams where over Rs 25,000 crore was carted away. But the conviction rate is abysmal, encouraging the scamsters to indulge in new scams. Rs 25,000 crore plus ELECTRICITY THEFT Of the total energy generated only 55 per cent is billed (Rs 62,000 crore). Of the rest, 20 per cent is lost to theft, costing the public Rs 22,500 crore, thanks to political patronage enjoyed by pilferers. Rs 22,500 crore Ghosh, Bagchi, Rastogi and Chaturvedi (1981) Capital Formation, Growth of Domestic Product and Capital Output Rations 8.7% of GNP at market price Shankar N. Acharya (1983) Aspects of the Black Economy in India 20% of GDP Arun Kumar (1996) The Black Economy In India 40% of GDP Sumana Chattopadhyay, Kausik Chaudhuri and Freidrich Schneider (2002) The Size and Development of Shadow Economy in India and other Asian Countries 23% of GDP in 1997-98

So unlike industry or rather manufacturing, where input-output ratios and consumption details could deliver a proximate picture, the tax sleuths have tried to rely on consumption as a measure of income levels. Therefore, in what seemed an innocuous statement in his budget speech, Chidambaram asked banks, credit card companies, corporates raising money from public, bond issuers and registrars of property to file annual information returns (airs). Indeed M.S. Darda, chairman, Central Board of Direct Taxes, believes that the combination of airs,

PICTURE SPEAK

POLL POWER: Parties need cash to survive

Tax Information Network (TIN) and pan make the department well-equipped to track down tax evaders. "Those who think they can evade tax," Darda told newsmen in Ahmedabad, "are living in a fool's paradise."

Based on different slabs for different transactions-say Rs 2 lakh per year on credit card spends-the airs were designed to deliver information to the Revenue Department.

Interestingly, the information received seems to vindicate the suspicions and lends credence to the estimates of the officials. Consider the quality of the data. India has over 15 million credit card holders. The average Joe holds the card for emergencies, style statement or both. A recent survey revealed that average spends of two-thirds of the owners is around Rs 18,000 per year. But the air revealed that 3.2 lakh card holders billed over Rs 2 lakh in 2004-5 on their cards. The airs on cash deposits apparently revealed a curious case of one person holding multiple bank and DMAT accounts. As many as 8,89,966 transactions, involving Rs 7,19,683 crore, were unearthed following the air on eight types of transactions. A special team looking at the data is struck by the volume. At a median rate of 20 per cent, this income profile should yield around Rs 1,40,000 crore in direct taxes, whereas, last year the Government collected Rs 1,29,000 crore.

It is true that income is not the only determinant of tax liability. The Indian system allows a host of legitimate exemptions that leave a wide gap between income and taxability. A large part of the unaccounted wealth is hidden in a maze of expenditure claims legitimately allowed by the tax regime.

There is the chronic leakage in industry too through over-invoicing of imports which has led to large-scale flight of capital. Last week, the Government revealed that over 46 per cent or Rs 78,390 crore of the FII flows into the stockmarket came through the secretive Participatory Note route. Obviously, much of this is the reverse flow of domestically alienated funds. Under-reporting of production is another critical leakage point. This leads to not just loss of excise revenue for the Centre but also moolah for debt-ridden states in sales tax. There is also the challenge of curbing the practice of cheque discounting used to transfer money from the white to black economy or vice versa. Apparently, an expert group formed by Chidambaram last year focused on this sector for over eight months and has come up with some estimates and ideas.

Be that as it may the eight-member team at North Block is confident that the emerging details would throw up more profiles. Unlike earlier, revenue officials are armed with data, thanks to the airs that shops have to record for big-tag sales. Already the buzz is out in the bazaar. Last week, Amit Banga, a top executive, got a call from his tax consultant: "Don't use your credit card too much, you could come in for scrutiny." Others are worried that the fear psychosis would drive demand down.

Chidambaram, though, scoffs at the fears. "This is a perverse argument. Unaccounted wealth is what we are looking for. Those who pay taxes have no cause to be worried. Besides, scrutiny is limited to 2 per cent and 98 per cent face no harassment," he says Chidambaram agrees that officials have to take care that the data does not become an instrument for harassment and assures that any wrong doing brought to his notice will be dealt with. Hopefully the profiles will also throw up people long suspected of being at the forefront of evasion and accumulation of unaccounted wealth-the babu-business-politician nexus.

After all, it is common knowledge that the font of black money not just flows from systemic distortions, it is nurtured by systemic flaws. Black money is created in the private sector as well as in public projects and services. Applicants for any document-be it a ration card or a passport- face hurdles unless palms are greased. More significant is the leakage of money in public projects. Nearly 20 per cent of the cost of public projects finds its way into the parallel economy. The Ministry of Statistics and Programme Implementation revealed in Parliament that "of 466 projects of more than Rs 20 crore, 213 have reported cost overrun of 74 per cent with respect to the originally approved cost". It is estimated that annually government projects deliver over Rs 60,000 crore in black money. Or take the case of merit and non-merit subsidies which account for over Rs 1,15,000 crore of the budgeted expenditure. Former prime minister Rajiv Gandhi said in 1985 that barely 15 paise of government spend reaches the public. Even at conservative estimates, over Rs 50,000 crore leaks out of poverty alleviation schemes.

Besides babus and business people, the largest cache of ill-gotten wealth is with the political class which uses it to fund elections. While MPs are supposed to spend less than Rs 25 lakh on elections, most serious candidates spend over Rs 4 crore. Where does this money come from? From distortions induced for funding their aspirations. The extent of electricity theft, the refusal to privatise public-sector units, the transfers racket and archaic clearances required by industry are all part of the planned landscape. As Kelkar points out, "Indians are from the same planet as others and are as virtuous as others and respond to policy changes and stimulus." Reforms on systemic distortions and accountability in governance are two major milestones that Chidambaram must consider for a more accountable economy. If India is to realise its ambitions of being a world superpower then it has to find funds for social sectors and upgrade infrastructure. That means it will have to make its economy more accountable or it will be doomed to be an unpaved nation.

Index