The Colour of Money

On September 30, the 90-day compliance window for citizens holding any foreign asset will end, unless the government decides to extend the deadline. Under the new Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, all foreign asset holders will have to declare their details by that day (if they have not already done so), pay 60 per cent tax and penalty - or else face a jail term of 10 years.

So far, according to Prime Minister Narendra Modi, almost $1 billion has been collected after the law was passed. Of course, tax officials say that typically most people rush to declare their assets only as the deadline nears - and the money actually coming in the last days could be four or five times of what has been collected so far. If the response is as good as they expect, the government would have collected around $5 billion or, perhaps, even $10 billion.

How much black money is actually lying outside the country? Given that black money is by definition money that is hidden away and not declared to tax and other authorities, it is impossible to come up with any sort of precise figure. A few years ago, the Central Bureau of Investigation had estimated that over $500 billion would have been stashed away abroad in the past decade alone. There are others who think that even more money has flowed abroad without the tax authorities having a clue - and it could be in the range of $800 billion or even more.

What everyone agrees - tax authorities and consultants - is that a fraction of the money hidden abroad would have come in by September 30. And, privately, most people following this area say that the government does not have much hope of actually getting big money just by enacting this Act.

Black money is a problem that most governments and countries face - barring those which have exceedingly low tax rates and are tax havens. Also, it is generally accepted that the higher the tax rates, the more temptation there is to cheat. Even the US, despite its enormous efforts to chase tax evaders, faces this problem. First, the super rich try to keep their earnings away from the tax man's scrutiny by using high-powered lawyers and tax consultants, shifting headquarters of their companies to tax havens, using shell companies and trusts, and generally finding and exploiting every loophole in the tax codes. If all that fails, some choose to shift their money and their homes and become citizens of a different country, one with a more benign tax regime. The US has seen a number of billionaires and multi millionaires renouncing their citizenship to move to tax havens.

In India, the highest tax evasion used to happen when the tax rates were as high as 90 per cent of earnings. Since then, things have got somewhat better as tax structures and rates have become more rational. Still the problem remains and is likely to remain for the next few decades. What politicians need to realise is that while promises of getting all black money make for great pre-election rhetoric, it is not as easy to fulfil them once you come back to power.

The only way to tackle the menace of black money is to first have an absolutely transparent and fair tax regime? and after that, one can begin with the compliance issues. Our cover package on the subject will give you an idea about what exactly the Black Money conundrum is all about.

Meanwhile, this issue also contains our best SMEs in India winners. Read their profiles starting page 64. Small and medium enterprises form the backbone of the country's economy, and it is only when they flourish that jobs are created, exports go up, and the economy flourishes.