|Getting black back|
|Wednesday, 15 February 2012 00:00|
Auctions help avoid 2G-type black money creation
After soaring from $462 billion (LK Advani, Global Financial Integrity) to $8.8 trillion (yoga guru Ramdev), the estimates of India’s stash of black money in overseas tax havens appears to be down once again, to $500 billion going by what CBI chief AP Singh said while inaugurating the First Interpol Global Programme on Anti-Corruption and Asset Recovery! While there is no way of really knowing whether any of the estimates are anything more than just a hunch, what does sound incredible is that, according to the US-based Global Financial Integrity’s estimates, even as India liberalised, the proportion of the economy that was black rose—from 27.4% of GDP in the pre-reforms period to 42.4% in the post-reforms period. Mind you, this is at a time when import duties were cut from 47.4% in 1991 to 7-8% today, when the top rate for corporate taxes was cut from 45% to 32.5%—given that the size of the black money is generally related to the levels of taxation, this does sound curious.
While many in the government will see these estimates as a reason to bring in yet another amnesty scheme in the Budget, some perspective is needed, apart from keeping in mind the fact that amnesty schemes send across the wrong message to tax-evaders—there’s no need to pay taxes right now, an amnesty is on its way soon. If, as GFI says, around $16 billion is spirited away by Indians to tax havens each year, keep in mind that this is less than 1% of GDP. While managing to catch this money, or getting it back into the country is important (the popular view is it comes back anyway via the Mauritius route), remember the government can get a whole lot more of taxes by trying to increase the tax-to-GDP ratio—this rose from 15.7% in 1991-92 to 17.7% in 2007-08 and then fell to 16.5% in 2009-10.
Since generation of black money through tax evasion can be curbed by lowering tax rates along with more effective tax administration, that leaves just one more source of generation—bribing government officials to get favourable land deals, preferential access to mines, spectrum and so on. This is where it is unfortunate, as FE’s lead story pointed out on Tuesday, that some top ministers in the government are still not convinced that auctioning of scarce natural resources has to be the preferred option (this is what the SC judgment on the 2G licences recommended), and that the older policy of government deciding is more suitable to the country’s needs. There is little evidence to suggest that, when properly designed, auctions lead to raised consumer tariffs—the most evocative example of this, of course, is that when Vodafone paid $11 billion to buy Hutch’s India operations, it did not lead to a hike in telecom tariffs.