by Vivek Kaul
The mess that currently prevails won’t be easy to sort out. The question remains as to where the land for the Make in India programme, which envisages turning India into a manufacturing powerhouse, will come from? In the short run, the state governments can use their land banks. But land from the land banks cannot last forever. The other solution is to cut down on Big Government.
Many loss-incurring central as well as state-level public sector enterprises have a lot of land at their disposal. These enterprises can be shut down, and the land that they have could be used for the Make in India programme. This could be a viable medium-term solution.
Of course, this would mean taking on the trade unions. No government till date has shown the gumption to do that. But if Make in India has to succeed, this risk needs to be taken. Whether it will or not, dear reader, your guess is as good as mine. Furthermore, it is worth remembering that the demand for land will continue to remain high on the edges of cities, and hence, land will have to be obtained mainly by displacing a large number of people. Given this, land acquisition will continue to remain a social problem, in addition to being an economic one.
xv Every area has a circle rate decided by the state government. The circle rate is the minimum value at which the actual transfer of property between seller and buyer should take place. Hence, the buyer of the property pays stamp duty to the state government at the circle rate.
9. BLACK MONEY—WE WON’T GET IT BACK
The punitive incidence of taxation, both personal and corporate, has only provoked contempt for taxation laws…. These restraining factors should be eliminated without further delay.
– JRD TATA, ADDRESSING A PRESS CONFERENCE ON MARCH 4, 1985556
Most Indians, like most individuals in any part of the world, do not read pink papers (i.e., newspapers which have news on business and the economy). But there is one coloured term in economics which almost every Indian is familiar with, and that is black money. At its simplest level, black money is essentially income that has been earned through legal or illegal means and on which taxes have not been paid.
The White Paper on Black Money released by the Ministry of Finance in May 2012 defines black money as “any income on which the taxes imposed by government or public authorities have not been paid”. The wealth that has been accumulated in this way “may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism and corruption”.557
Of course, this wealth that has been accumulated through tax evasion has “neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession”.558
The question is: How is black money generated? At a simple level, black money is generated every time a citizen pays a bribe to get something done. In the eighties and the nineties, it meant something like paying small amounts to the local telephone linesman in order to ensure that the landline connection worked fine at all points of time.
In cities like Mumbai, it means paying a bribe to the local beat cop so that you can park in places where it is not allowed to park. An excellent example of this is on display at the Bandra-Kurla Complex in Mumbai, with many cars parked on the road despite the availability of a huge car park. The reason is straightforward: bribing the local beat cop turns out to be much cheaper than parking one’s car at the car park for the day.
At a slightly higher level, it means paying a donation to the school where you want your child to be admitted, as anyone who has tried to admit a child to a so-called ‘public school’ in India is likely to admit. The donation culture is a part of higher education in India as well. Money changes hands when people pay bribes to get their children admitted to private engineering and medical colleges (more in medical colleges than in engineering colleges).
Then there was also the case of companies generating black money during the days of the licence raj as it existed during the 1970s and the 1980s. As Sanjaya Baru writes in 1991—How PV Narasimha Rao made History: “One of the worst legacies of the licence-permit raj was to restrict firm and plant size. Joint secretaries in Udyog Bhavan [where the Ministry of Commerce and Industry is based in New Delhi] decided the capacity of firms, neither the market nor the technology…. This did not mean that every company adhered to government regulations. All it meant was that such restrictions encouraged corruption. Companies would operate at scales well beyond their authorised capacity and sell the excess output in [the] black market. Inspectors and taxmen would be bribed.”559
Furthermore, it is common for landlords to demand rents in cash so that they don’t have to pay any tax on it. A similar tactic is at play across many restaurants as well. It is clearly visible in Goa, where some of the most famous restaurants around the Bardez area do not accept payments through credit or debit cards. I guess no one wants to leave a trail and have to pay income tax on the money that they have earned.
Many service professionals, from doctors to chartered accountants, to lawyers, insist on being paid in cash. A few years ago, I used to occasionally accompany a friend who had a rare disease to a famous doctor in Mumbai. My friend typically used to be the last appointment for the day, and on more than a few occasions, I saw the assistant hand over a polyethylene bag to the doctor, which presumably had a huge amount of cash in it. This doctor, like most doctors, did not accept payment through a credit or debit card.
Of course there are many such examples at the individual, institutional and government levels. In fact, black money gets generated at the corporate level as well. In the recent past, this has come to the forefront, with many crony capitalists taking PSBs for a ride. The way this typically works is that a crony capitalist presents a project proposal for which he wants the bank to lend money. The projected costs are heavily padded upwards and are shown to be much higher than they are in reality. As soon as the bank lends the money, the promoter starts siphoning it off. The money that is siphoned off is nothing but black money because the promoter won’t be paying any tax on it, for sure. And when this money is put to use, more black money is generated.
Furthermore, builders and home-owners as well insist on a certain proportion of the price of a home being sold to be paid in black. Of course, this proportion tends to vary, depending on which part of the country one happens to be in. The proportion tends to peak in areas in and around Delhi (i.e., in the National Capital Territory). In many parts of the country, car parking lots typically get sold in all-cash deals.
Of course, when it comes to real estate, even home-owners selling homes insist on a certain part of the payment being made in black. If the deal is in the 70:30 ratio, then the buyer has to pay 70 per cent of the price of the home in white (i.e., through a cheque) and the remaining 30 per cent in cash, of which no account is kept.
In fact, black money in real estate continues to stay in real estate and helps in the creation of more black money. I realised this during the course of an interesting conversation I had with one of my relatives a few years ago.
This gentleman had bought a flat in the sub-city of Dwarka in New Delhi sometime in 2002 at a price of around Rs. 25 lakh. The area was totally undeveloped at that point of time, and hence, property had been going cheap.
More than a decade later, in 2013, the flat was worth something around Rs. 2 crore (the value has fallen since then). The flat had been bought as an investment. He planned to sell the flat and use the money to meet the expenses of his daughter’s education as well as her wedding.
The balance that remained after meeting his daughter’s expenses was to go into his retirement fund, given that he had no plans of working beyond the age of 63-64. During our conversation, I suggested to him that it would be a good idea to sell the flat and invest the money in different debt mutual funds, the logic being that Rs. 2 crore was more than enough to meet his daughter’s education and wedding expenses and, at the same time, add to his
retirement kitty.
So it made sense to lock in on the gain and preserve the Rs. 2 crore that he had managed to accumulate by investing in the flat rather than look for more gains. Also, by investing in debt mutual funds, the returns that he would have earned would have been like a fixed deposit, but the after-tax returns would have been much better, given that he could have taken indexation into account while calculating and paying his taxes. Indexation essentially allows the cost of purchase of a flat to be adjusted for inflation while calculating capital gains.
The after-tax returns would have been in the range of 7-8 per cent, and he could have made a decent Rs. 14-16 lakh every year, which would have further compounded if he had stayed invested. He liked the idea, but immediately came up with a reason which essentially made the idea untenable.
The reason for that was very simple. Although he would have got offers from several buyers who would have been willing to buy the flat at Rs. 2 crore, none of them would have been willing to pay him the entire amount in white, i.e., by cheque. The buyers typically would have paid around half in cash and half by cheque.
As mentioned earlier, my relative had bought the flat at Rs. 25 lakh, most of which was financed through a home loan. The remaining came from the savings he and his wife had put together. So, all the money invested to buy the flat had been paid for in white. He had been lucky, given that the builder he had bought the flat from was building his first project and was more interested in offloading what he had built rather than insisting on being paid in black.
The property dealers my relative had been dealing with to sell the flat had clearly told him that if he wanted the entire Rs. 2 crore to be paid by cheque, then he could more or less forget about selling the flat. At best, they could get a buyer who would pay up to Rs. 1 crore in cheque; the remaining Rs. 1 crore would be paid in cash.
For someone who had largely led an honest life, he couldn’t figure out how he would go around handling cash to the tune of Rs. 1 crore. The brokers had a solution for this as well. They could help him buy gold bars. Or, if he was willing to bet his money on real estate again, they could showcase some projects coming up on the outskirts of Gurgaon in Haryana, or in Greater Noida in Uttar Pradesh.
Maybe he could buy two flats there, they suggested. And if he found all this too risky, he could simply store away the money in a couple of bank lockers. Even that could be arranged for, it was suggested.
My relative’s situation is a very good example of all that is wrong with the Indian real estate system as it has evolved. Since a good proportion of the transactions are carried out in black, the cash that is thus generated needs to be put to use in some way. Just putting it away in a locker isn’t really a solution.
Money needs to keep growing. The amount paid in black can also be used to buy more real estate. And this is how the cycle of black money in real estate continues. When a flat is sold, a proportion of the payment is made in black, which finds its way into real estate again (through the purchase of more flat/s).
The point is that if a real estate investor wants to sell his property, he has to be ready to receive at least a part of the payment in black. If he doesn’t want to be paid in black, it will be very difficult for him to sell his property. Once he has sold the property and received the money, he needs to put the ‘black’ money to use again. This means buying more real estate in a cheaper location, where the prices are low. And so the cycle of black money continues, with investors selling to each other, driving up prices and making real estate unaffordable for those who want to buy a ‘home’ to live in.
In fact, not surprisingly, real estate remains the number one conduit for black money in the country. A report by the business lobby FICCI on black money, published in February 2015, points out: “The Real Estate sector in India constitutes… about 11 per cent of the GDP of the Indian Economy, as these transactions involve high transaction value. In the year 2012-13, the Real Estate sector [was] considered as the highest parking space for black money.” 560
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There is no clear estimate of how much black money India has. Estimates range from around 20 per cent of the GDP to around 75 per cent of the GDP (as we shall see later in the chapter).
While there are no clear estimates of how much black money the country has, there is enough evidence going around to suggest that India has a lot of black money going around. A major reason for this is the high tax rates (another good example of Big Government) that prevailed in the country well into the 1990s. As we saw in Chapter 1, the great JRD Tata had to sell assets every year in order to pay income tax and wealth tax.
In fact, the highest marginal rate of income tax was at 97.5 per cent in 1970-1971. Given this, it is not surprising that many people who should have been paying income tax never got around to doing the same and, instead, hid their income in various ways.
Tax rates have fallen over the years, with the highest marginal rate of income tax being at 30 per cent for close to two decades now. But this hasn’t led to the total amount of black money in the system coming down.
In 1991-1992, only 1.58 lakh Indians had an assessed income of more than Rs. 1 lakh. These individuals constituted around 3.5 per cent of the total number of individual taxpayers. These taxpayers paid around 40 per cent of the total income tax, at an average rate of 35 per cent.561
Interestingly, the population of India in 1991 was around 88.8 crore. Hence, 0.02 per cent of the country’s population paid around 40 per cent of the total income tax collected from individuals. Have things changed since then? The trouble is that the Income Tax Department does not regularly release income tax data.
As the famous French economist Thomas Piketty said regarding this issue in the Indian context: “There is [an] extreme lack of transparency for data, especially income tax data…. It is very difficult to get data from [the] authorities.” He further said that he did not understand why there wasn’t any pressure on the government to make income tax data public.562
Nevertheless, in late April 2016, the government did release income tax data for the assessment year 2012-2013, i.e., for the income earned during 2011-2012. This data threw up many interesting data points, which tell us very clearly that there is a huge amount of black money within India. Let’s take a look at a few points.
a) During the assessment year 2012-2013, around 2.88 crore individuals filed income tax returns. The total income tax collected from these individuals amounted to Rs. 1,14,555 crore. The interesting thing, nonetheless, was that only 1.26 crore individuals paid any income tax. Data from the World Bank shows that, in 2011, the population of India was 124.7 crore. This means that, in the assessment year 2012-2013, only a little over 1 per cent of India’s population paid income tax.
One explanation for this is straightforward, and that is that income from agriculture is untaxed. Close to 50 per cent of the country’s population still depends on agriculture for a living. Furthermore, this also tells you that India is a poor country, where most people earn a taxable income of under Rs. 2.5 lakh per year, only above which one has to start paying income tax.
What this also tells us, among other things, is that a significant part of the Indian economy continues to operate in the ‘black’ zone. Hence, a tremendous amount of black money is generated, on which income tax does not get paid.
b)As we saw earlier, in 1991-1992, 1.58 lakh individuals, or 0.02 per cent of the population, had an assessed income of more than Rs. 1 lakh. How did things look two decades later? In 2011, India’s population was around 124.7 crore. 0.02 per cent of this works out to around 2.49 lakh. Given the limitations of the way in which the data has been declared, obtaining an exact figure is impossible. Nevertheless, in the assessment year 2012-2013, around 2.89 lakh individuals declared an income of greater than Rs. 25 lakh. Hence, it is easy to see that things have improved since 1991-1992. Nevertheless, the proportion of the population that actually comes under the income tax system continues to remain insignificant.
c)Aro
und 3.94 lakh individuals paid a tax of greater than Rs. 5 lakh. In total, they paid an income tax of Rs. 64,313 crore in the assessment year 2012-2013, which made up for around 56 per cent of the income tax paid by individuals.
Furthermore, around 13.9 lakh Indians paid an income tax of greater than Rs. 1.5 lakh for income earned in 2011-2012. In total, they paid an income tax of Rs. 91,109 crore. This made up for around 79.5 per cent of the total income tax paid by individuals for the assessment year 2012-2013.
This means that around 0.11 per cent of India’s population (13.9 lakh divided by 124.7 crore) paid around 80 per cent of the income tax paid by individuals in the assessment year 2012-2013. This is one data point that clearly tells you how few Indians actually pay income tax. It also tells us that, while the situation is better than what it was two decades ago, a lot still remains to be done to get more individuals to pay their personal income tax.
d)Only around 26 lakh Indians declared income from house property under the individual category. A total income of Rs. 29,927 crore was declared under this category.
Of these, around 6.06 lakh individuals showed a negative income from house property. These would primarily have in cluded people who would have taken on a home loan to buy a house and were repaying it. During the financial year 2011-2012, an interest of up to Rs. 1.5 lakh paid on a home loan, in the case of a self-occupied house, could have been deducted from the income while calculating the taxable income.
This means that an individual repaying a home loan on a self-occupied house could have shown a negative income of up to Rs. 1.5 lakh when it came to income from house property. This negative income could have been deducted from the income earned during the course of the year, and the taxable income could thus have been brought down.