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Saturday, September 18, 2021

Bharat’s story of Black and White money

The latest available World Bank’s Findex 2017 Report had brought out that the proportion of adults with a formal account in Bharat has risen from 35% in 2011, to 53% in 2014, to 80% in 2017. Bharat has also made extraordinary progress in reducing the country’s gender gap in account ownership, from nearly 20% in 2014 to 6% in 2017 (World Bank Group, 2018).

However, Bharat still continues to be the second country next only to China with 191 million (China 224 million) people over the age of 15 remaining without a bank account as on 2017.

Total digital payments in Bharat

                              Volume (in Lakhs)                                                    Value (in INR Crs)

  2017-18 2018-19 2019-20 2017-18 2018-19 20119-20
Total digital payments 1,45,902 2,34,339 3,43,455 13,69,86,734 16,38,52,285 16,23,05,934

(Source:https://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1293.)

Currency with Bharatiya public increased from Rs 17.54 lakh crore at the time of demonetization in 2016 to Rs 28.27 lakh crore in March, 2021. Volume of currency notes have increased to 12.43 lakh pieces in March, 2021 from 9 lakh pieces in March, 2016.

Share of high value currency in the system

Share of high value currency in the system (Rs. 500, Rs.1,000)which was 86.4% before demonetization in 2015-16 declined to 73.4% % mainly due to demonetization in 2016-17. However, the same (Rs. 500, Rs.2,000) has again increased to 85.7% in 2020-21.

The above data indicates that though there has been a significant increase in the financial inclusion of the adult population of the country still the unbanked adult population is very large. The above data also indicates that post demonetization the volume and the value of digital transactions have considerably increased.

However, the volume of currency in circulation as well as its value has also equally increased post demonetization. Therefore, unless and until the country achieves close to 100% financial inclusion of its adult population we will continue to have major chunk of economic transactions that take place in the form of currency and the volume of currency in circulation cannot be curtailed drastically. This is what the lessons from demonetization has taught us.

Black money

One of the stated objectives of the demonetization was to bring back the black money which is mainly held in the form of cash.  In February, 2019, the then finance minister Piyush Goyal told Parliament that Rs 1.3 lakh crore black money has been recovered through all anti-black money measures including demonetisation. This figure is much lower than the originally estimated target of Rs.3-Rs.4 Lakh Crores which the government was expecting due to demonetization alone.

In 2016, the year when demonetisation was launched, 6.32 lakh counterfeit pieces were seized across the country. According to RBI the number of counterfeit notes seized is 2.08 lakh pieces in 2020-21, 1.7 lakh pieces in 2019-20, 2.2 lakhs in 2018-19 and 2.4 lakh pieces in 2017-18. This data indicates that the counterfeit currency notes have not reduced post demonetization and they continue to exist.

While black money is generated by avoiding payment of tax on the taxable income it is mostly invested in real estate and gold. The black money so generated through unaccounted cash is also converted into white through banking channels by creating dubious commercial transactions.

In the same way the black money stashed abroad passes through the banking channels by under invoicing of exports /over invoicing of imports whereas the black money so stashed abroad is again brought into the country through the banking channels by over invoicing of exports/ under invoicing of imports.

Liberalization of FDI norms has given scope for using the FDI route to bring back the black money stashed abroad and of late this is the most preferred channel. There are several countries that are tax havens and hub of dubious FDI funds through which the FDI inflows come into Bharat.

What is a tax haven?

The Organisation for Economic Co-operation and Development (OECD) defines a tax haven as “a country which imposes a low or no tax and is used by corporations to avoid tax which otherwise would be payable in a high-tax country”. Tax  haven countries have the following features: (a) nil or very low taxes (b) absence of effective exchange of information and (c) lack of transparency in their legislative, legal or administrative provisions.

Top 10 countries in terms of Financial Secrecy Index (FSI) 2020

1 Cayman Islands
2 United States
3 Switzerland
4 Hong Kong
5 Singapore
6 Luxembourg
7 Japan
8 Netherlands
9 British Virgin Islands
10 UAE

Automatic exchange of information and registration of beneficial ownership are the prerequisites for transparency of financial data and disclosure of the source of funds.

FSI ranking is based on a combination of a country’s secrecy score and the country’s share in the global market for its offshore financial services.

FDI and black money

As far as Bharat is concerned, Singapore (rank 5), Mauritius (rank 51) and the Netherland (rank 8) are the top three destinations through which more than 50% of the country’s FDI equity inflows and outflows  are routed.

According to IMF-University of Copenhagen study report 2019 titled- The Rise of Phantom Investment, $15 trillion of the total $40 trillion FDI all over the world was in the form of ‘phantom’ FDI structured to avoid corporation tax. Thus the ‘phantom’ FDI which is 37% of the total FDI is equal to the combined annual GDP of China and Germany!

This study report identified Luxembourg, Netherlands, Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, Cayman Islands, Switzerland, Ireland and Mauritius as the Phantom FDI host countries that collectively constitute 85% of the total Phantom FDI in the world. Out of this Luxembourg and Netherlands alone account for 50%.

Funds parked by Bharatiya individuals and firms with Swiss banks in 2019 which was 899 mio SF (Rs.6,625 Crs) rose to 2.55 bn  SF (Rs. 20,700 Crs) in 2020.

Breakup of the 2.55 bn SF parked by Bharatiya individuals and firms with Swiss banks is as under:

  • Customer deposits 503.9 mio SF
  • Held via other banks 383 mio  SF
  • Through fiduciaries or trusts 2mio SF
  • Bonds securities other financial instruments 1,664.8 mio SF

An analysis of the data released by the Department for Promotion of Industry and Internal Trade (DIPP) on FDI inflows, from April 2000 to December 2019 show that top three tax havens account for 59% of cumulative FDI inflows. RBI data on FDI outflows, from April 2012 to Mach 2018 show that the top three tax havens account for 55% cumulative FDI outflows or Outward Direct Investment (ODI).

Therefore, this must be a matter of concern to Bharat as this indicates that the FDI channel is being used for not only to bring funds into the country from abroad where the funds are originally parked due to very low taxes or nil taxes but more importantly origin of these funds and their legitimacy is not disclosed due to the shelter provided in those tax haven nations which gives ample scope for initially routing the black money from Bharat to those countries and in turn bring back the same into Bharat through the FDI route. This is effectively nothing short of money laundering.

Political parties & black money

At the end of 2019, the number of registered unrecognized political parties stood at over 2,500 and there are 7 national parties and 64 state parties that are registered and recognized. The Election Commission, had caught around ₹3,500 crore worth of cash, liquor and drugs by May, 2019 during the country’s general elections that was obviously unaccounted. Whereas experts estimate that the actual amount spent in these general elections would be around Rs.16,000 Crs.

With an average number of 15 contestants in each constituency with an official ceiling of Rs. 70 lakhs per candidate the total permissible amount of election expenditure all over the country (543 constituencies) would be Rs.5,700 crores. It means an estimated sum of Rs.6,800 Crs unaccounted money was likely to have been spent by all the candidates across the country in 2019 general elections.

All the above indicate that black money is still very active in the economy both within the country and abroad. There is a need for a cohesive and strategic approach to tackle this menace. The author suggests the following steps in this regard.

  1. Aim at reaching close to 100% financial inclusion of the adult population of the country.
  2. Bring digital transactions payment and protection Act to give shield to the people against digital frauds and reduce the transaction charges to give a push to the digital economy.
  3. Reduce the volume of currency in circulation and totally remove high value notes in a phased manner.
  4. Insist for total transparency and disclosure of the source and legitimacy of the funds that are routed through FDI into the country by bringing the required legislative measures to suitably amend the existing FDI norms.
  5. Review the existing laws on electoral bonds and make them transparent by disclosing the identity of the donors and bring them under the purview of Income Tax authorities.
  6. Bring political parties under the purview of public authorities as defined in the RTI Act and remove the tax exemptions given to them.

This requires a political will and since all political parties are cut from the same cloth they may not be keen to initiate the above measures as it would be detrimental to their interests. People should realize that all money held in the form of cash need not be black money like all money held in the bank which also need not necessarily be from legitimate source of origin as it could be camouflaged by multiple layering. Therefore, there should be a people’s movement to address this problem.

Reference:

  1. https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?year=2021
  2. https://fsi.taxjustice.net/en/introduction/fsi-results

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Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 14 years of teaching, research and consulting. 100 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 20 short stories and 27 articles published in Telugu. Email id: [email protected]

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