Feb 22, 2009

Today the Indian economy is suffering due to the menace of black money which has made deep in-roads into every sector and is damaging the very fabric of our economy. "Black Money" is nothing but a euphemism for concealed and unaccounted for income and wealth on which taxes have been evaded. Some of the major sources of black money are in areas such as: import licenses, selling of cement licenses, iron and steel, transactions in heavy industries, transaction in public sector, release of industrial licenses, government and commercial transactions, forged and fake currency to name a few. Ideally, we should have achieved an economic growth rate of 8%, a figure arrived at keeping in mind rising population pressures and infrastructural development requirements. However, we are lagging behind; with the economic growth rate no where nearer to the rate expected by eminent economists. Black money is one of the major factors responsible for de-accelerating this pace of development of Indian economy.

However, there are people who are experienced in the financial field and very much concerned about the evil tentacles of black money. They are constantly evolving and devising ways and means to counter and eradicate this menace. In this connection a proposal was sent on 22 Jan., 09 to the Central Board of Direct Taxes (CBDT), the apex body for tax matters in India. CBDT is a part of the Dept. of Revenue in the Ministry of Finance. It was also sent to the Prime Minister’s Office (PMO) with a covering letter addressed to Prime Minister & Finance Minister Manmohan Singh. The proposal calls for inclusion of an additional column in I-T Returns form to seek information on accounts held by taxpayers in banks abroad. CBDT is seriously considering this proposal as it will empower its Dept. to seek information particularly relating to clandestine bank accounts held abroad. NB Singh, Chairman of CBDT is reported to have said: “These suggestions should be acted upon (forthwith).”

This proposal was made by K. Vasanth M. Pai, who retired in Nov. 2001, as Chief Commissioner of Income-Tax, Mumbai. KVM Pai originally belongs to Mangalore. He was born to Kulyadi Panduranga Pai and Leela Pai on 26 Nov, 1941 at Mulky, in D.K District. He completed his M.Com, IRS. Currently, he is leading a retired life with his wife Gayathri at Kadri Road, Mangalore. The couple has two sons K. Radhakrishna Pai and K. Prashanth Pai who are both working in the SAP field in USA. One of the highpoints of his career as Chief IT Commissioner was the meticulous manner in which an investigation was carried out by his team into the assessment of tax liabilities of the accused in the Securities Scam of 1992, including those of the Harshad Mehta group. The result of the said famous case is now history.

Mr Pai’s proposal is included in a comprehensive document prepared by him, entitled “Black Money In India: An Analysis Of Its Menace And Growth - It Is Time For Hot Pursuit Action” It deals at length on the generation of black money in the Indian economy and the I-T department’s role in checking it. Pai’s suggestions assume great significance, especially in the light of reports appearing in the foreign media of deposits held by Indians in Swiss banks and other tax havens, which is higher than the total value of deposits held by citizens of other countries such as Russia, UK, Ukraine and China.

The other radical proposal made by Pai in the said document, calls for modifying some regulations by which the I-T department will be empowered to reopen its assessment beyond six years. Present stipulation for income tax assessment is up-to six years, in case of taxpayers found to be having undisclosed accounts abroad. As per IT laws withholding important financial details or furnishing wrong information will invite penalties. Therefore, due to this proposal of Pai, those holding bank deposits abroad will incur heavy penalties as well as face possible imprisonment, if they do not disclose this important piece of information.

As is well-known anyone having furtive accounts overseas without informing the Reserve Bank of India (RBI) is violating Indian laws, especially under the Foreign Exchange Management Act (FEMA). Therefore, if this proposal does become law, the information furnished will be open for verification by the I-T department. In response to a question from this correspondent as to what makes him so confident that the Swiss Authorities will furnish information of such obviously secretive Indian accounts, to the Indian Govt.

Pai replied “Due to immense international pressure after the 9/11 dastardly attacks in US, the Swiss Govt. is now more open to divulging information on individual accounts in its Banks. However, they have put a condition that only if the concerned governments formally ask for it, will they do so. Unfortunately, Govt. of India has till date not asked for any such details from the Swiss Govt. Hence my endeavor now is to ensure that our Govt. takes swift action on this matter of national importance. My proposal will help in bringing back at least a portion of the huge sums of money stashed away there. The Govt. by not taking effective action against such money has imposed on itself the scandal of the largest loot of such money in world’s economic history,” he declared dramatically.

Quoting from a Swiss Bank Report of 2006, Pai informs in the document that Indians hold total deposits worth $1,456 billion, an amount much larger than the value of deposits held by others like Russia which has deposits worth $470 billion, UK $390 billion, Ukraine $100 billion while China has $96 billion. However, the authenticity of this figure of $1.456 trillion is yet to be confirmed. Shockingly, it is more than the size of India’s GDP. According to Pai this amount from India, is about 13 times larger than the country’s foreign debt.  And if this  sum comes  back  to  India,  our nation’s  entire foreign debt  can  be  repaid off in 24  hours. Not only that, after  clearing the entire  foreign  debt,  we  will still have a surplus  amount 12  times larger  than  the foreign  debt.  Furthermore, if  this  surplus money  is   invested  in earning  interest,  the entire amount  of  interest  will  be more  than  the  annual   budget of the Central  Government. 

Pai in his document sent to CBDT, also recounts how as an investigator, during his tenure in IT department, he had come across several instances of Indians having undisclosed accounts in countries other than Switzerland such as the USA, UK, France, Germany, Canada, the Isle of Man and Dubai. In-fact according to him, Dubai is as secretive as Swiss banks. In this connection he mentions the problems he faced while investigating the overseas bank accounts of Harshad Mehta’s group, who were the central figures in the 1992 Securities Scam. They had deliberately concealed information from the Indian IT officials, about the amount deposited clandestinely by them in banks abroad. 

Giving a real life incident Pai recounts “Sometime in 1980, we as a team conducted a surprise raid in Ahmedabad at the residence of a rich person. At that point in time a mere interrogation and search  of  a particular postman who happened to bring mails to the owner yielded  documents of some banks  in England, showing  bank  accounts held  by the said Indian owner. On being confronted with facts, the taxpayer immediately confessed that the said amounts were not declared (for IT assessment) to the IT Dept. in India which ran into millions in those days. He then agreed to have his accounts to be assessed as concealed income.” 

Pai in the document also refers to a study carried out by the IT Dept on the basis of data collected from surveys carried out by it. It was found that only a quarter of an individual’s total income is shown in the books of accounts for taxation in Mumbai. The latter in-fact accounts for 35% of the Income tax and 43% of the corporate tax collected in the country. Pai states in the document “It came to light that none of the tax-payers concerned declared for taxation purposes anything more than 25% of their true incomes, after 1999. The figure arrived at was given to the press specifying the basis on which it was arrived at. Not a single protest was received from any of the taxpayers, including companies. The figure was thereafter cited some more times and even then no protest was received.  There is therefore every reason to believe the estimate; however there appears to be higher tax evasion in the case of Companies.”

Furthermore, Pai opines that what is urgently needed is a good intelligence network similar to the IRS model practiced in USA as also computerization of entire IT department. The IRS of USA, he states has an organized capability of gathering information particularly documents pertaining to tax evasion from all sectors of the economy, which in turn has resulted in substantial revenue collection. Since there is no worthwhile intelligence framework now in the IT Dept in India such a model should be replicated here, he proposes.

With regard to the Voluntary Disclosure Schemes (VDS) introduced in the country, Pai considers the same a total failure. The Central Government, he states in his document, had evolved some 12 VDS and other such schemes which actually yielded negligible revenue. While the first disclosure in 1965 yielded revenue of Rs. 50 crores, by 1997 the collection had barely touched Rs. 10,000 crores. The reason was that the taxpayers abused the schemes to convert black money into white by paying nominal amount as tax. In fact the last VDS of 1997 was questioned by the Supreme Court, which held that the Govt. should stop the  disclosure schemes and concentrate on detecting tax evasion through investigation  and searches. In the concluding part of the document Pai urges citizens to be more pro-active and demand quick action from Parliament, Judiciary, Executive, Civil Society Organizations, and Administration in the matters pertaining to tax evasion. This, he believes, will help to eradicate the menace of black money forever.