They would play hide and seek. A banker, who nowadays is neck deep in work, "restructuring" the black cash of the rich, promises to meet the writers. Then backs out. "It's hectic today," he texts on WhatsApp. "We have audit which will continue for the next three days." His bank, we learn, has fired him after his illegal cash management expertise was discovered. A second money handler agrees to talk on phone and then never picks the call.
A businessman says he is running a clean business for the past one and a half years. Prior to that, he would do many things, from hoarding cash to cooking up disputes with investors to close down companies. He is travelling right now. "Can't talk more about this on phone. Can't meet."
By a rare stroke of luck on a rather frustrating day, we manage a meeting with a lawyer. His office is sandwiched between tattoo studios and 'Cash for Gold' shops. He has been busy, too. At 4.35 pm, when the meeting is set up, he is still lunching. He has been sleeping in the office; cooking too. A small white statue on his desk has "Sue the bastards" inscribed.
"There is a fear psychosis," the lawyer says, as we ask him about demonetisation and its impact on black money. His bureaucrat friends, who have property in their wives' names, are nervous. "North Delhi Municipal Corporation has started issuing a Unique Property Identification Card. Any property transaction from here on would be tracked. And this move might be implemented by other states." He is, of course, helping them and his clients. Some have been advised to move abroad, and some are buying loss-making companies through back-dated transactions. 'Entry Operators' - people who create shell companies - are making a killing. A spurt of land buying in Nepal is being talked about.
Large chunks of cash with businessmen have been restructured into parcels of Rs 2 lakh. Unorganised workers, mostly hired labourers, are being asked to deposit in their bank accounts, keep Rs 20,000 and return the rest in new currency after the dust settles in. That's one flavour of money laundering. "It is difficult for the government to go after each and every labourer," the lawyer says. Jan Dhan accounts are flushing with cash. Estimates are that deposits have surged almost 30 times by around Rs 21,000 crore in just 14 days since the government's November 8 announcement on the withdrawal of high-denomination currency notes.
Still, there is fear among the lawyer's clients: "Misrepresentation of income can result in jail now. Earlier, the mentality was to show a lower taxable income. Now, what will be declared will be at a logical distance of the actual income."
The problem for scam-stars is that the government seems to be reacting with speed. On November 24, the Union Cabinet reportedly discussed amendments in the existing income tax law to levy 60 per cent tax on 'unaccounted' money deposited in bank accounts between November 8 and December 30. The amendments could be tabled in Parliament during the ongoing winter session.
Black is staggering
Over the decades, those wanting to show lower taxable income or avoid taxes altogether employed a variety of means. Companies indulged in "master roll fudging" where wages and employment were inflated. Companies also under invoiced to generate black money. Black money generation in cash is rampant in businesses with annuity income, such as medical or engineering schools, mining and of course kickbacks that are accepted by bureaucrats and politicians. And not to miss the professionals - charted accountants, lawyers, financial advisors - who actually help restructure black money. Any estimate of this black money in the system can be staggering.
In The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, Dev Kar, an economist with a Washington-based non-profit Global Financial Integrity, estimated that illicit flows totalled $213 billion in illegal capital flight during this period. He later adjusted the estimates to peg it at $462 billion. "The adjustment had to do with the total present value of illicit assets held abroad by Indian residents. So I assumed that none of the black money ever came back. Then I applied the US Treasury bill rate to compound and calculate the cumulative present value of all the outflows over the period 1947-2008," he said. Arun Kumar, a former professor at Jawaharlal Nehru University's Centre for Economic Studies and Planning, stresses on the difference between 'black income' and 'black wealth'. Black income, he estimates, is about 62 per cent of India's GDP. Black wealth (assets created and parked in real estate, gold, diamonds, foreign currency, art objects overtime) is a multiple of about 3.5 times this number, a staggering Rs 300 lakh crore. The cash component of black wealth is Rs 3.5 lakh crore. "India's black economy has grown from 4-5 per cent of GDP from 1955 to the present 62 per cent. There is no magic wand," Kumar says, when asked the obvious: will demonetisation help in curbing the black?
Kumar, like many other economists, also question the economic rationale of demonetisation. He says a slowdown can set in, as discretionary sales pause and small businesses are hit by the cash squeeze. Some economists remain perplexed by the choice of the Rs 2,000 denomination. "As an economic policy, it's irrelevant. As a moral policy, it is bang on," says Amir Ullah Khan, an economist. "Everything seems logical in demonetisation except for Rs 2,000. The whole premise is high value notes hide black money. You can't double the value and say this is a solution."
While the near-term economic logic may seem weak, the plan on black money appears to be well thought out. Demonetisation is just one leg. What has generated the fear psychosis is a combination of many things executed over the past two years by the Narendra Modi Government. "They are attacking the ecosystem... and ecosystem is not a one-time measure. Through these measures, the signal is clear that black, illegitimate money will be attacked," says Jagvinder Brar, Partner of Forensic Services at consulting firm KPMG.
The strike isn't surgical
A Supreme Court monitored special investigation team (SIT) was first set up. In its fifth report in July 2016, SIT recommended that "there should be a total ban on cash transactions above Rs 3,00,000 and an Act be framed to declare such transactions as illegal and punishable under law". SIT also suggested an upper limit of Rs 15 lakh on cash holding. Around the same time, markets regulator Securities and Exchange Board of India (SEBI) wanted stricter KYC and disclosure norms for Participatory Notes - an entity investing in P-notes thrives on anonymity and is not required to register with SEBI.
The government then came up with the Benami Transactions (Prohibition) Amendment Act, 2016, wherein a property held by or transferred to an individual but provided or paid by another, can attract an imprisonment of up to seven years. There was also The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (to bring back money held abroad) and the domestic black money Income Declaration Scheme (IDS). More than Rs 65,000 crore worth of disclosures were made under the scheme that offered people with black money a one-time chance to pay up 45 per cent in tax as well as penalty. The Double Taxation Avoidance Agreement between India and Mauritius, and India and Cyprus was amended. An understanding was reached with Switzerland for getting information on bank accounts held by Indians with HSBC.
Finally, the biggest tax reform in India's history - the Goods and Services Tax (GST) - is also a veritable spanner for black marketeers. By bringing more businesses in the organised sector from the unorganised, it can reduce the generation of black money. Businesses would need to be registered and acceptance of invoices will be incentivised from suppliers to claim input tax credit. This transactional information would enter the tax systems and therefore reduce the share of unaccounted transactions. For instance, India's trade is one of the biggest components of the service sector, which deals in cash. GST is expected to bring traders not only into the tax net, but also move them to the digital transactions space.
To say that people will forget all these steps is a gimmick to distract, some feel. All the cash that is being deposited in banks now is generating audit trails. "After a couple of months, all this data will be in the hands of authorities such as the Income Tax Department. That is when they can observe the patterns that are emerging. Three years ago, it was not possible to map transactions. It was a manual exercise," KPMG's Brar says. There will be a surge of alerts triggered by the transaction monitoring system of banks and the same would result in an increase in filing of Cash Transaction Reports, Counterfeit Currency Reports, and Suspicious Transactions Reports.
Some builders and those who invest in land have gone cautious. A builder in Bangalore says the split between white and black in a real estate deal in the city used to be 60:40, sometimes 50:50. "Now, we expect the land cost to fall. In future, the ratio might become 85: 15, or even 90:10," he says on phone.
Arvind Virmani, former chief economic advisor to the government of India, says he would never have recommended demonetisation. "But, I am happy that the political-policy-babu-police-mafia nexus will be the greatest losers from this action. The positive effect of eliminating black money element of 50-60 per cent in the total price of real estate, will be much more significant than is recognised by many economists. Governments must lower circle rates and stamp duties to facilitate it."
But even as we write this piece, many real estate companies and builders with projects on ground are flush with cash like never before. A charted accountant, who did not want to be identified, spells out the details. "In their books, real estate companies usually have a lot of cash in hand, whereas in reality they do not have physical cash. They are accepting the cash from hoarders at a 30 per cent premium and depositing in banks. So, Rs 1 crore would change for Rs 70 lakh." As a result, the real estate company is getting free working capital at no interest, at 30 per cent premium to be paid back over a period of one year or so. This has no documentation and is usually negotiated on faith and contacts. And this system of transfers is working well with jewellers, and industries that usually work with high levels of cash in hand in their books.
This implies that even with the fear psychosis, the corruption bucket can be leaky.
Black money expert Professor Arun Kumar nowadays shuttles between television studios. He meets Business Today in the cafeteria of a media house. "You have caught the thief, but not the theft. New thieves will emerge," he quips. A doctor who charges Rs 1,000 and declares only Rs 250 will continue to do so, he reckons. "Services is the biggest area of black economy generation. The services sector produces 75 per cent of the black economy. Government cannot eradicate the black economy by this move. It might just happen at a lower rate and a slower pace for sometime," he adds. KPMG, therefore, recommends that the government next bring the segment of designated non-financial businesses and professionals (DNFBP), which includes accountants, auditors, lawyers, trusts and company service providers, jewelers in gold and precious metals, under the purview of enhanced due diligence measures of Regulated Entities.
Indeed, Business Today learns that officials in the Ministry of Finance along with the Parliamentary Committee on Finance are deliberating on ways to expand the tax-to-GDP ratio, and one of the ideas is to look for efficient ways to tax rich farmers and professionals such as doctors, CAs, and lawyers. "The present government must realise that the Income Tax Act has outlived its utility. The answer to the current scenario is the Direct Tax Code. The draft was prepared by the last UPA Government. We are ready to deliberate any amendments they want to bring. The need of the hour is to move coherently to curb generation of black money," says Congress leader M. Veerappa Moily, who also chairs the Parliamentary Standing Committee on Finance.
Another big area that needs fixing is gold. A paper on demonetisation from KPMG states that one of the key next steps in the fight against black money could be "direct proceeds of gold sale to be credited to the bank account above a certain threshold (for example Rs 50,000) and make PAN furnishing mandatory for such transactions. This will tackle dilution of hoarded black money and can also have transformational impact". Most black money watchers are expecting gold imports to rise, post the demonetisation episode.
This brings us back to the lawyer whose office is near a few gold shops. At one point during our meeting, he looks contemplative. He lights up, puffs, and places the cigarette on the corner of a crystal ashtray. He wonders what's coming next from Modi. "I think it will be the amendments to The Prevention of Corruption Act; also, scanning of companies under the Registrar of Companies." He needs to prepare for more nights at the office.
With inputs from Anilesh S. Mahajan