What do the income disclosure or amnesty schemes reflect on the government?

What it suggests is that the government under the normal schemes is not able to take care of tax evasion. It has tried various schemes like the voluntary disclosure scheme in the past but nothing much has been achieved. They cannot come up with voluntary disclosure schemes anymore because in 1997 the government gave an undertaking to the supreme court that henceforth there will be no further schemes for amnesty. It is unfair for an honest person. The current scheme [IDS] is counterproductive. If we will have such schemes again and again, people get the message that you generate black income today and you can convert it into white later.

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The CAG report on the 1997 voluntary disclosure scheme said that honest people are eventually becoming dishonest and more and more people are becoming habitual tax offenders. Therefore the voluntary disclosure scheme was stopped. Once the government stopped the voluntary disclosure schemes, it opened the Mauritius route to bring the black money in the country. The current scheme is not voluntary and the government is also levying tax and penalty on the disclosure.

All this suggests the government’s inability to tackle the black income and that is why black economy is continuously growing. It has grown from 4-5 percent of GDP in 1956 to about 60 percent of GDP at present. It means 60 percent of the economic activity has illegality. How can illegality be so widespread? It can only be if those who are in charge of the implementation of the policy are party to it.

How strong is this parallel economy?

In India the black economy is not parallel to, but is intertwined with, the white economy, unlike in the West. Here we use black money for a lot of activities like buying a house. We can take profit in the stock market and can get our black money converted into white.
There are two kinds of income: one comes in production and the other is the transfer income which is only in circulation and is not generating any productivity, like buying or selling a house. The real estate is not a generator of black money but a circulator of it. Similar is the stock market.

In my estimate, all the sectors are generating black income and the bulk of it is coming from the service sector, which is 62 percent of the GDP. It includes all kinds of services like transportation, hotels, restaurants, finance, entertainment business and other business services, and professionals like lawyers, doctors, CAs. People do not disclose their actual income; even teachers who take tuitions are not showing that as their income.   

We do not talk about judicial corruption, but there is massive corruption there. At 60 percent of the GDP, the black economy is systematic and systemic. So therefore it is a political matter rather than a technical one.

Do we really need such schemes to uncover black income?

Nothing much is happening on ground. That is why the government is in panic. They have also extended the deadline to September 30, 2017 for paying taxes. The various statements by the ministers and the prime minister show that nothing much is happening. The government is desperate. The foreign money bill did not get them anything. Lakhs of Indians have money abroad and hardly '4,000 crore has been declared, which is peanuts.

The important point is not the scheme but its implementation. If I have my money abroad and I know that the government cannot tackle me, then why would I bring it back? Unless you ensure people are caught hold of, it does not matter how many schemes you announce. Politicians are a party to the whole system and even their own money is involved. And to do this they involve the bureaucracy. That is why you have all types of illegalities flourishing. It is a well-defined system.

What do you expect from the current scheme?

I don’t have much expectation because I do not see the bite – the political will. If the government had the political will it would have first cracked down on everybody. For instance, in the HSBC case, names have been revealed not because of the investigation by the government but because of the stolen data. And after that the government did not even do any prosecution. HSBC was working as a hawala operator, taking money out of India and bringing it back. No action has been taken against them. We know that all private banks are operating this way. Even some of the public sector banks are also operating on the same lines. The government has not shown the will to act against them. I always argue that it is not a technical matter but a political matter. No point in bringing more laws and schemes unless there is political will to implement them on ground. 

So what really needs to be done?

Political will also means that the public has to be conscious. If they do not put pressure, nothing will be done. During Anna Hazare’s and Baba Ramdev’s movements a lot of public pressure was generated. People had become aware, they were demonstrating. When Ramdev came to Delhi for the fast, four cabinet ministers went to receive him at the airport, because they were under pressure. Suddenly they brought the Lokpal bill. Without public pressure no party will act. Honesty is not personal but social and collective. The history shows that pressure generated through public movements has created huge impact on political will. But these movements have not sustained for long. Also, the government knows how to manipulate things and side-track them. The Anna Hazare and Ramdev movements fizzled out eventually.

The government needs to start nabbing wrongdoers at the very beginning. But they say they do not want to affect the business environment. The moment you do that businessmen know that no action will be taken. The government is confused by its own rhetoric. That philosophy has to be changed. The environment should be made easy for the honest but very difficult for the dishonest. In the income tax department there is very little prosecution. Most of the cases fall through. The message goes that one can get away with no matter whatever they do.

There is a gap between the actual income and the income that is disclosed, how can that gap be filled?

In 1984, we did a study for CBDT. We sent the questionnaire to all commissioners. The commissioners agreed that 95 percent of the department is corrupt. That number would be 99.5 percent now. There would still be people like [Ashok] Khemka. But then the government punish them for being honest. 

Honest officers have to be strengthened. But then the system knows everybody will be caught. Therefore, they do not allow them. There is crony capitalism which needs to be stopped. Scams like Coalgate and 2G are examples of that.  

Is the government taking enough steps to fight corruption? Is there a need to strengthen the regulatory system?

There is no doubt that something is being done. But a law is a law on paper, in letter and spirit. If spirit is not willing then I will find a way to circumvent it. Black income generation has continued because people find ways to circumvent that. There is no perfect law. But the law has to be implemented in spirit. For instance, there was a rule that if you undervalue your property by more than 15 percent, the government could acquire your property. But that didn’t work. We know that properties are undervalued for more than that. That continues. So just by introducing rules you do not change the situation on ground. Technology by itself will also not make much difference. People behind it have to be honest. In India, the elite class, the businessmen, bureaucracy – have always tried to circumvent the laws. It has become the mentality to break rules when you are in power. And that is what even public expects. Take, for instance, Arun Bhatia, the famous IAS officer who cracked down on the employment guarantee scheme in Maharashtra. His final posting was in Pune as commissioner. He caught the real estate mafia. And the government transferred him. The city rose up and because of the massive protest he had to be brought back. He then stood for election in 2004, and got only 50,000 votes. Public also expects corruption. They know that the honest person will not help them get a wrong work done. So unless people rise up against this political system, nothing will change. Over the years, tax rates and controls have come down but the black income generation has only increased.

What is the impact of the black money on the economy?

It is tremendous. There are two things. One is that black economy also produces something. But the problem is that it leads to massive waste of resources. There is activity without productivity. The investment productivity has declined in India because of this. We have been losing 5 percent rate of growth since the mid-1970s. Had the black economy not grown, each one of us would have been seven times richer; our per capita income would have been higher. We are missing out $13 trillion of development every year. The negative effect of black economy is huge. We have shortage of resources for education. We have never been able to spend more than 3 percent of GDP on education. On public health we spend less than 1 percent. Look at the state of health. All the social sectors and infrastructure are being affected. All of the economic and social problems we are facing today are because of black income. The effective number of taxpayers is only 1.5 million. Everyone is dissatisfied. There is a sense that social justice is not there. So it has alienated people.

Can things really be changed?

Yes. Take England of 1810, for instance. There was massive corruption. In London, in the 1950s because of smog, the visibility was very less during the daytime. The Thames river was dirty and stinking like the Yamuna. But things improved because of movements. There were movements for 100 years, which made people conscious that eventually led to change. All the countries have gone through this. It is the question of how quickly the public consciousness comes. It has to do with the public consciousness and public accountability. That is why RTI is very crucial. It means you cannot do things secretly. Major scams in the last few years have been exposed because of the RTI. Public accountability of business, bureaucracy and judiciary has to be there.