India attacks its black money market

Press, 25 February 1981, Page 20

India attacks its black money market

By

COLIN SMITH

in New Delhi

For over a year now the Cyprus High Commissioner in New Delhi has lived with his family in a hotel rather than move into more permanent accommodation in New Delhi’s diplomatic quarIter. This is not because the High Commissioner is particularly fond of hotel living. Even a five-star ambience begins to wane after a time, but the diplomat is almost resigned to seeing out the remaining 18 months of his tour in the duplex suite. The reason for this apparent extravagance is simple: the Cypriot Government refuses to pay what is locally known as “black money’’ to rent a suitable residence for their representative in India. Black money, which is money acquired through evading taxes, is India’s second economy. Current estimates about how much is in circulation range between $B4OO and $36,000 million. Government investigations have indicated that only about half of the taxes due are ever collected.

There is a long tradition of successful tax evasion in India. The Moghuls, the East India Company and the British Raj itself all experienced great difficulty in collecting what they thought was due to them despite propensity to bum the villages of the un-co'-operative. Ten years ago a Government committee, in a 75,000 word report on the subject (that’s about the length of the average novel), calculated that 50 per cent or more of tax evasion occurred among the middle-in-come group of the self-em-ployed such as shop-keepers and truck operators. It is a common practice for landlords to insist on the drawing up of phoney rental agreements whereby half the true rent is declared and the rest paid under the table, sometimes in foreign currency. No receipts are issued for the undeclared money because the landlord fears blackmail. But the small time entrepreneurs are by no means the only offenders. Indian

economists reckon that the sugar, cement and steel industries alone inject an annual $4BOO million into the black money market. The Ind’ Government has been -‘tempting to end black money for years. The tax department, constantly trying to plug loopholes and sharpen its detection rate, has also offered amnesties under a voluntary disclosure scheme. All to no avail. Taxes are high but, for the sharp-witted, the holes in rne system are many. Now the Government has gone even further than an amnesty. L. its latest bid, it is offering to launder black money, turn it into white money, by issuing special bearer bonds. Thse bonds are valued at $l2OO each and will be redeemable in 1991. plus a small amount of interest, about $240. The price of this laundering is the difference between the 2 per cent being offered on the bonds and the prevailing black money market interest rate, which can be as high as 36 per cent. The bonds went on sale in banks through the country this month. The of •, which

remains open until the end of April, is very discreet, with the Government stressing that anonymity is guaranteed and that no. attempt will be made to record the names of purchasers. But reports so far indicate there there have been very few takers. One reason given for

this is that many Indian businessmen have been at open war with the tax department for so long they cannot bring themselves to trust the profferred white flag. A newspaper cartoon here depicted a would-be purchasr arriving at a bank with a paper bag over his head.

Another explanation for the poor response is that few'. of the really big tax evaders, who have put their money into property or other investments, are willing to convert their assets into cash to bujUbonds, especially at the poor interest rate offered. Nor does the fact that the bonds can be bought with foreign currency seem to have • tempted many of those who have squirrelled their money away in foreign bank accounts.

The bonds have also been described as an irrelevant measure because it fails to get down to the root cause of black money: punitive taxes and licence restrictions. Many economists in India argue that, until taxes are reduced to a reasonable level, people will always find it worth the legal risks entailed in dodging them, . For the moment, it ioo.ks as if the Cypriot High Commissioner’s chances of moving out of his hotel remain as bleak as ever. — Copyright, London Observer Service.