Beyond the Black Money Bill

No focus on stock markets and other money-laundering machines

After all the noisy assertions, only Rs4,147 crore of unaccounted wealth was declared during the special 90-day compliance window of the The Undisclosed Foreign Income and Assets (Imposition of Tax) Act, 2015 (Black Money Bill). Of this, just Rs2,488 crore will come into the government’s tax kitty. Bringing unaccounted wealth, or black money, back to India was one of the major planks on which Narendra Modi led the National Democratic Alliance (NDA) to power in 2014. But this ill-conceived attempt at mopping up black money through a draconian new law has predictably flopped, that too very badly.

This can lead to two possible outcomes. A good one, where the government changes track and works at initiating meaningful action against the generation and laundering of black money. The bad option would be to act on the dire threats issued by the finance minister and his officials (after the compliance period ended) and let loose an indiscriminate reign of tax terror. This will make India an even worse place to do business and further damage the government’s credibility.
A former income-tax officer, who has been helping the special investigation team (SIT) on black money, makes a simple point. If you want to stop the generation of black money, you have to plug all the official sources of laundering it and put it back into circulation.

There is plenty of information on what the government needs to do to reduce, if not eliminate, the generation of black money. This includes some excellent issues flagged by the SIT, appointed by Supreme Court, headed by Justices MB Shah and Dr Arijit Pasayat.

One of the biggest sources of laundering black money is the stock market. For several years now, Moneylife has reported the brazen manipulation of illiquid stocks and the silence of the regulator. Then, in July 2015, the third report of the SIT on black money pointed a finger directly at SEBI in a detailed section on how stocks were manipulated to misuse the exemption on long-term capital gains (LTCG) tax.

The SIT asked SEBI to put in place an effective monitoring system to flag unusual price movements and also share the information with the financial intelligence unit (FIU) and the central board of direct taxes (CBDT).

In a further criticism, the report said that merely barring entities that indulged in price manipulation is not enough of a deterrent; SEBI must inform the enforcement directorate to initiate action under the Prevention of Money Laundering Act.

SEBI chairman UK Sinha responded with an interview to PTI on July 2015 claiming that SEBI has strengthened its online surveillance which gives ‘100 alerts a day’ and makes it difficult for anyone to get away with manipulation. He also claimed credit for a crackdown by SEBI on such manipulation. This is interesting because, in response to a Right to Information query from Moneylife, SEBI had said that it did not have any data on alerts put out by its market surveillance systems (until the end of March 2013) and, consequently, could not give us any information on action taken on the basis of those alerts.

We now know that SEBI was not only tardy about acting on the manipulation of penny stocks, but its failure to record adverse findings caused the income-tax department’s efforts against bogus LTCG claims to fail. Former revenue secretary Shaktikanta Das’s ‘secret’ letter to SEBI chief (revealed in Debashis Basu’s column in Business Standard), pointed out that the Income-Tax Act prescribes a time limit for assessment and raising tax demands and SEBI needs to act faster, and more decisively, to support the efforts of the I-T department.

The finance ministry, under the United Progressive Alliance (UPA), was hardly known to encourage stringent action against market manipulation; nor did it demand accountability from the regulator. Will things be different under the NDA? We now have a proactive revenue secretary in Hashmukh Adhia and he is also believed to have the ears of the prime minister (PM). It remains to be seen if he cracks the whip and stops one segment of the stock market from being one large money-laundering machine. There are several other issues flagged by the SIT and other experts that need Mr Adhia’s immediate attention in the effort to stop the generation of black money.

These are:

• Prevent the misuse of participatory notes (PNs) or offshore derivative instruments (ODIs) to launder black money. According to the SIT report, SEBI said that the value of ODIs issued at the end of February 2015 was a massive Rs2.7 lakh crore.
• Stop the creation of ‘shell companies’ to provide accommodation entries and launder funds. The SIT asked the serious frauds office (SFO) in the ministry of company affairs (MCA) to mine the MCA21 database for information on such companies based on common names, phone numbers, addresses, directors, etc. The moot question here is whether the government will adequately empower the SFO and act on its suggestions.
• The SIT recommends the creation of a central know your customer (KYC) registry to connect independent identity proofs and data available with various regulators and government agencies. This would assist in identifying multiple transactions. Another benefit would be the reduction of harassment and multiple compliances demanded from law-abiding persons.
• The SIT report has a detailed discussion on cricket betting. It points out that “illegal betting leads to malpractices such as match-fixing or spot-fixing” which also cheats the bettors. The SIT cites a FICCI-KPMG report of 2013 which points out that only betting on horse racing, casinos (in some states) and lotteries conducted by state governments were legal in India. Cricket betting, which is a massive Rs3 lakh crore business, is banned. Legalising cricket betting and levying a 20% tax on it could generate revenue of around Rs12,000 crore-Rs19,000 crore, says the report. Will the NDA government have the courage to do it? Or will the cosy cabal of politicians, cutting across the political spectrum, which controls Indian cricket, ensure that this cash machine, which funds political parties, remains untouched?
• The SIT has suggested a reasonable threshold, of around Rs10 lakh to Rs15 lakh, for holding cash currency. This would allow proper regulatory action across a large spectrum of dubious, cash-only activities such as drugs/narcotics deals, corruption/bribery, betting, donations to educational institutions and election funding.
• Another big generator of black money is real estate which is not only in short supply but also controlled by politicians. Successive governments have studiously avoided mapping and digitising land and real estate records, registrations and stamp duty in a manner that there is complete transparency—from the process of acquiring land to sale of a built-up product. Doing this would probably end the rags-to-riches stories of a large portion of politicians who attribute their riches to real estate development. Again, will NDA bell this cat?
• Speaking at a Moneylife Foundation seminar in April 2015, BJP leader, Dr Subramaniam Swamy, had suggested that illicit wealth stashed in tax havens abroad by Indians should be declared as national wealth and directed to be transferred to India under the United Nations’ Convention on Corruption. This is another area that directly affects super-rich politicians and industrialists.

In short, there is enough clarity on how black money is generated and laundered. The government could have easily used the many existing laws that cover benami transactions and money laundering and acted through its existing arms such as income-tax, enforcement and financial regulators, using information dug up by the SIT. And, yet, the NDA government created a new law that was mainly aimed at recovering wealth stashed abroad. Was it designed to avoid, block, confuse and divert (ABCD), as Mr Modi once said about the bureaucracy? We will know, soon enough.