Political parties have promised they will bring black money stashed abroad. Global Financial Integrity has estimated that Rupees 31k crores was remitted illegally out of India in 2002. This increased more than ten times to 424k crores in 2011. This is nearly equal to the total developmental expenditure of the Central Government which stood at Rs 543k crores in that year, and includes spending on education, health, urban development, agriculture, industry, fertilizer subsidy, power, irrigation, roads and railways. The expenditure under these heads can be doubled if the illegal remittances can be stopped.
There are three components of these illegal remittances.
One component is corruption- Politicians and bureaucrats prefer to stash their ill-gotten incomes in foreign countries so that it remains outside the reach of the Government of India.
Second component is tax evasion- Income from property deals or from sales of goods is sent abroad for safe keeping. And the third component is transfer-pricing by Multinational Corporations- the MNCs buy goods from their sister concerns in foreign countries, and pays more for imports than the actual price.
The share of corruption in the total illegal remittance, however, appears to be small. The United Nations has set up a panel on Illicit Financial Flows from Africa under the Chair of Thabo Mbeki, former President of South Africa. Mbeki said that two-thirds of these funds originate from MNCs. About one-third arise from criminal activities, including drugs and human trafficking. And about 5 per cent are the result of corruption or bribery. Global Financial Integrity has similarly said: “In the cross-border flow of illicit money, we find that funds generated by this means are about 3 per cent of the global total. Criminal proceeds generated through drug trafficking, racketeering, counterfeiting and more are about 30 to 35 per cent of the total; and proceeds of commercial tax evasion, mainly through trade mispricing, which is the largest, is 60 to 65 per cent of the global total.”
The role of MNCs in these illegal remittances from India are confirmed by the estimate of outflows. The illegal remittance from India has increased more than ten times during the last decade. The coming of MNCs and outflows of illegal remittances increased together, and bad governance has played a key role in this outflow. It is reported that outflows from Mexico decreased after liberalization while those from India increased because governance in India made it easy for the MNCs to bleed the country.
During his stint as finance minister, Pranab Mukherjee had scared MNCs to the sidelines after making retrospective changes in tax laws and unveiling the General Anti-Avoidance Rules (GAAR) to fight tax evasion. And had linked the Vodafone tax issue to the government's fight against black money.
There are three steps that can be taken up directly by the new government to stem this outflow without requiring any cooperation by foreign governments. The first step is, it should be compulsory for the MNCs operating in India to disclose detailed balance sheets of all their sister concerns operating globally to help government track the money that has been transferred out of India without any consideration.
The second step should check the payments made by the Indian arm of the MNC against the payments received by the foreign sister concerns. This will help India claim taxes on the amounts transferred, and help government check the value of imports and exports against benchmark prices that are prevalent in the global market. And will help expose over-invoicing of imports and under-invoicing of exports by the MNCs.
The third step should be that all foreign transactions above a threshold limit should be reported to the Income Tax Department. Presently banks are routinely required to inform the department of cash deposits in excess of Rs 50k. A similar provision can be made for reporting foreign transactions. This will enable the department to track ‘habitual’ remitters of money.
These steps are beneficial and should be taken by the new government at its own initiative.
Other initiatives that are equally important would require cooperation of foreign governments. The G-20 has agreed to share information regarding taxes paid by MNCs amongst themselves. India can push for similar bilateral agreements with G-20 as well as other countries to ascertain if the MNCs dodge paying taxes in India and paying tax at lesser rates that are prevalent elsewhere, and simultaneously should also push for bilateral- or global treaty to force the tax havens like the Bahamas to disclose the identity of owners of all companies registered in their country. Infact, India can push for inclusion of such a provision in the World Trade Organisation also.
In the implementation of the above, the conflict arises only because of the infatuation of our government with the FDI. There is no doubt that the FDI inflows will be hit as soon as the government takes these steps. It should therefore be clear that, stemming illegal remittances and attracting FDI simply cannot go together, and therefore the choice will have to be made between the two.
India received FDI of Rs 168k cores in 2013. The outward illegal remittances, on the other hand, were Rs 424k cores in 2011. It is obviously more profitable for us to stem the outflow of RS 424 crores rather than to attract the FDI of Rs 168k crores. But to dismay the Congress Government has always thought and done otherwise.
The hype of bringing back black money stashed abroad that is doing the rounds in the elections is likely to backfire, if the above is not implemented by the new government at the center. It will be a task to track this money, to prove it is illegal, to bring it back, and it will therefore require the cooperation of foreign governments who have interest in attracting more illegal deposits, as it can work as a direct and effective approach to stop the illegal remittances being made by MNCs. The new government needs to walk on these lines.
-Dr Bharat Jhunjhunwala (The author is former Professor of Economics at IIM Bengaluru)