'Impossible to put a figure on black money'

Durgesh Shankar, a former member of the Central Board of Direct Taxes, shares his insights into how black money is generated in India and ways in which it could be checked. Edited excerpts:

Any rough estimate on the size of the unaccounted money in India?
It is very substantial. It is virtually impossible to put a figure to it. But I know that a study has been given to three distinguished institutions and they will be able to get it out.  Let me be very clear. Black money is money that accrues on account of violation of law. It could be proceeds of crime, it could be proceeds of drug-dealing, arms, and even terrorism.

In India we have over-legislated. We have also brought in a large amount of our personal moralities into legislation. A classic example is prohibition. We need to have a critical look at the entire edifice of our laws and junk those laws which have lost their validity. They have lost their validity because technology has changed. We need to take a penetrating look at our laws and more importantly, our procedures.

A lot of money that has been siphoned out comes back laundered and is legally deployed, what the bankers term as "grey money". How do you distinguish between black and grey money?
We are walking a tightrope between tax evasion and tax avoidance. The moment it becomes tax avoidance it ceases to be criminal, it becomes grey. The government has vacillated. We have had three or four VDISs (voluntary disclosure of income scheme). They have had limited effect. We need to make the cost of non-compliance so prohibitive that you find making compliance more sense. The trouble is when you delay the impact of legal consequences, the system gets affected and that is what has happened.

How hamstrung is the government in getting money back?
Every country needs to work out its own system. The important thing is it needs to be consistent. Overall impression needs to go down among people that you mean business. I mean executive legislature and judiciary. You cannot have even one of them falling out of line. We have signed the UN convention on corruption. We have to work on our laws.

One thing one hears about is that the Mauritius tax treaty being misused. Given the kind of leverage Indian government has over them, there is a feeling we are not pushing them hard enough in renegotiations (of tax treaty that are currently underway).
They are very tough negotiators.

How to get the black money back?
It is easier said than done. Don't forget you are dealing with one of the most "successful sections of society".  These are the guys who have made money, who don't care about laws. They can hire the best brains. They may wield considerable authority in their own right. There are many ways of doing it. It needs to make its own system attractive as an investment destination that they are tempted to bring back money.

Then, are you going to accept the money and how do you ensure it channelized into good investment? Undoubtedly, there is a large amount of Indian black money abroad. There is also a large amount of Indian black money within the country. Most of it is also used in running businesses. Go to Dharavi. See how much business is going on. It is outside the tax system. Why don't we work on bringing this into organized fold? What does it entail? Legalize their activity. After all, they are using power illegally, they are using water illegally. Legalize these colonies, at the same time enumerate them, bring them within the ambit of organized activity. I don't say don't go after black money abroad. But first of all let's clean up India. Once you clean up, two things will happen. GDP will register skyrocketing growth and generation of further black money will stop.

What would you suggest to reform the domestic economy?
Let us talk rural first. That is one area where you won't have any data, but rural India is generating a lot of black money. It may be politically sensitive, but you cannot be an ostrich. If the society is really serious, then bold decisions at every level will have to be taken. Let agricultural operations in respect of essential food items be out (of tax net). But what about other activities?  The processing, the mandi, the trading. We have set up huge cooperatives in mandis. They have all become great sources for giving a cloak of respectability to unaccounted money. It is not an insurmountable problem.

Have some of the recent tax intelligence measures helped, such as 360 degree profiling by tapping into databases of banks?
Of course. How else have we achieved these targets (of tax collection)? The advantage of profiling is that the moment you confront the taxpayer they surrender because the trail is there.  Why income tax department hasn't been able to do much more is because of acute shortage of trained manpower.