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    South Asia
     Nov 1, 2005
Tackling India's black economy
By Priyanka Bhardwaj

NEW DELHI - Revenue department officials over the past few weeks have been impounding luxury vehicles brought into the country without paying the requisite duties.

The government has taken more than 50 such vehicles, including top-end Toyota Prados, Landcruisers, BMWs, Jaguars and even a Porshe. Some of these cars cost more than US$300,000, given that the tax on such imported cars can be more than 100%.

Importers of these cars have been using loopholes in existing laws to sell them to rich customers. Recently, officials seized a Hummer allegedly belonging to film star Sunil Shetty.

It is not known whether the buyers of these cars knowingly evade the taxes, but the entire episode has highlighted another aspect of the way business/trade happens in India - the slew of controls, norms and prohibitive duties that has engendered the growth of



the black economy. Black money has long been a subject of debate in India. The purchase of luxury cars is just the tip of the iceberg. It is estimated the government loses some $50 billion annually due to tax evasion.

Huge cash flows estimated at more than $100 billion form the basis of financing property purchases, money laundering, funding of political parties, corruption, opening foreign accounts and even drug and arms deals. There is a flourishing illegal economy in India that remains out of the tax dragnet with only 20 million out of a population of more than a billion paying taxes. Other estimates put the level of economic activity determined by black money to the tune of 30-50%.

Self-employed lawyers, businessmen, doctors, designers, property agents and traders get away with paying a pittance as compared to the perpetually harassed salaried employees who have no choice but to pay up. Agricultural income, often higher than salaries, remains untaxed, given the politics of keeping farm incomes untouched.

The black economy is an important reason for declining revenues as a proportion of gross domestic product (an abysmal 14%) mobilized by government (center and state) in recent years. This in turn leads to higher fiscal deficit and inflationary pressures on the economy. Recently, a report by Transparency International pegged India at a lowly 88th among the 156 nations rated on levels of corruption.

Indian Prime Minister Manmohan Singh, a trained economist who, as finance minister, oversaw India's economic reforms in the early and mid-1990s, recently said there was no single mechanism or approach that would be able to effectively tackle corruption and black money.

"I think there are still far too many custom and excise rates, besides too many exemptions, which give scope to unscrupulous bureaucrats to indulge in graft. We have to tackle the problem of tax reform, not only to raise the tax-gross domestic product ratio but also to reduce the scope for arbitrary actions on the part of bureaucrats that give rise to various sources of corruption."

Earlier this year, a rather curious declaration in the budget speech of Indian Finance Minister P Chidambaram set off the chatter on black money once more. The budget for the financial year 2005-06 contained a proposal of a 0.1% tax to be imposed on the withdrawal of cash of Rs10,000 (about $250) or more from banks or ATMs on a single day.

"I will come down heavily [on tax evaders] ... We have taken a small step," Chidambaram said in an interview, referring to the tax on cash withdrawal. "We have documentary evidence that huge cash transactions take place and they leave no trail at all. This is how black money is generated and circulated from hand to hand. We have taken a small step."

However, it soon became apparent that Chidambaram had got it wrong on the withdrawal tax and Indian corporates reacted. "This is counter-productive: if the aim is to track black money, there are other ways of achieving that purpose," said Madhur Bajaj of Bajaj Auto. Though the measure was withdrawn due to a public outcry, the intentions of Chidambaram were not in doubt.

This, however, is not to take away some other steps by the finance minister to ramp up government revenues and widen the tax base through a mix of more government control, relief to the salaried and at the same time making it more difficult to evade as opposed to paying taxes. Chidambaram has laid out the central system of Value Added Tax (VAT) to ensure more administrative compliance, while the 2005 budget raised exemption levels, lowered tax rates and ended a complex labyrinth of special allowances that are expected to raise $1.2 billion.

The tax net on the services sector, which now accounts for 52% of India's GDP and had largely escaped taxation, has been widened. There have been attempts to rationalize customs duty by lowering the basic rate.

In the past couple of months the income tax department has raided the premises of bureaucrats known to be corrupt and recovered illegal cash from the home of several personalities related to the film industry in south India. It is paradoxical that some of the biggest catches happen to income tax officials themselves, bribed by the rich seeking relief.

Indeed, India has come a long way in its attempts to streamline the red tape that acts as an incentive for even an honest person to beat the system rather than be part of it and face harassment of officials. A large component of the problem has been due to over-regulation of the economy as well as industrial and import licensing, which were the major causes of corruption in public life. Since India embarked on the path of liberalization and economic reforms in 1992, many of the teething problems of what was termed as the License Permit Raj (rule) have been done away with.

The black economy is one arena that has to be treated carefully in order to ensure the government does not turn into a "Big Brother" that can stifle growth and entrepreneurship. At the same time a paradigm should be facilitated wherein it becomes easier for a citizen to abide rather than evade.

When the government hauls up people for evading taxes on purchasing cars, the question to be asked is whether the system and the laws balance the aspirations of the abiding taxpayers and the need for social equity. It has not been easy so far.

Priyanka Bhardwaj is a New Delhi-based writer.

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