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Dirty Money Is Not Just Black

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Dirty Money Is Not Just Black

Last updated: February 11 2013
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  • Dirty Money Is Not Just Black

    An real interesting, different article ( Comments, please )-





    We complain about black money. For most of us, black money is money in suitcases, printed notes of currency. We imagine that there are huge stashes of currency in politicians' houses, that industrialists are, quite literally, rolling in the stuff. Our new-age yoga enhanced civil society members even demand that we should stop the use of Rs. 500 and Rs. 1000 notes because they help corruption.

    And I say that at a macro level, we should be more worried about white money.

    Because RBI's statistics — they release this every week — say that the total amount of rupees in notes printed is about Rs. 10 lakh crores. Our GDP is about 80 lakh crores. Even if 30% of the total money printed was being hoarded as black money, it's about 4% of GDP. This is not small; but I argue that this is not big enough. I mean there is much more illegal money out there than 4% of GDP. And that also means the black money is being laundered into white money quite easily.

    From doctors to lawyers to small hotels to vegetable vendors, there is a large amount of cash exchanged. Some of these merchants keep the money in cash, and refuse to declare them, thus creating black money. Many buy property, transferring money to the uber-rich, who can now launder the money.

    At the really big money level, laundering money isn't very difficult. First, the cash generated is sent out of the country through hawala, which involves calling someone who says give cash to person X and we'll deliver dollars to person Y. Once it's offshore, it's brought back in, in various ways. Since Switzerland, till recently, didn't ask too many questions, a lot of money went into Swiss banks (and banks in Dubai and other not-so-cooperative countries).

    Then some of it was channeled back to India as "FII" —a foreign institutional investor - money, back into the Indian equity markets. There are then numerous ways to use that money to pump up the stock price or otherwise distribute the money in the "white" channel. In 2007, when SEBI and the RBI expressed their desire to curb such investments by demanding more details of the eventual source, the markets tanked 10% and hit the lower circuit the next day. SEBI clarified that the restrictions would apply only after 18 months and everything went back on track.

    Why does equity investing become attractive? Equity investing is tax free if you hold the money for over a year. Also, for short term money, FIIs also use the Mauritius route to come into India, and because of a Double Taxation Avoidance Treaty, India doesn't tax such entities — and it turns out that Mauritius doesn't either. No tax means a great opportunity to launder money; the only problem with black money is that no tax is paid on it.
    (If a minister is paid the highest ever rental for any commercial property at the time, that seems to be ok. Because he'll pay tax on it. Or so it seems.)
    Special Economic Zones (SEZs) for instance, pay no tax. So all one has to do is set up an SEZ in India, and then send money in from abroad against an invoice. When exports were tax-free, money was laundered there. Now with the Minimum Alternate Tax (MAT) reaching 20%, this avenue is less useful.

    Agricultural income is tax free, so within some limits, there is "income" generated there. You can't really question a farmer about why he ended up selling SO many coconuts, can you? But this avenue is not open to most of us anymore, especially not to film-stars.

    The answer isn't to ban high denomination notes. The answer is to take serious action against the laundering of black money. We need to question the source of any money coming to India, especially FII money — if they're not willing to reveal details, tell them to go away.

    We also need to remove all tax-free concepts, including agricultural income, SEZs and Equity investing (the last one is going away next year). NGOs that get income tax exemptions need to be monitored very closely; they are another way to turn taxable income into "tax-free" money.

    Since this will inconvenience actual users or farmers, introduce an upper limit — say 10 lakhs a year of profit — below which the tax-free rules continue to apply. There is absolutely no need to keep things tax-free after you've crossed a certain profit limit, even if you wanted to encourage industry. (Stop when it's encouraged!)

    We must absolutely bring back the illegal wealth stashed abroad; but it's complicated to figure out how. Does Swiss bank money of people who are now abroad not be brought back? Does a person of Italian origin, who can move money to family in Italy, then qualify as not having black money? Does one give legitimate income — from investing in India through FIIs — thumbs up, simply because we aren't able to prove that the original money, years back, was really black money? Or do we go to the other extreme, and say that all money is black unless proved to be white? The "proof" will take years of court process to prove, no one will get access to the money, except the people in power.

    But we don't have an alternative right now — set up a mechanism to query every single account that has money owned by Indian residents, and question their sources. In fact, find out who have recently transferred OUT their money out of fear of such an investigation, and question them even more.
    We need to pick up enforcement of laws against the conversion of black money to white. I have no doubt that we are generating far more than 4% of our GDP in black money — but the figures show that the money doesn't stay black; there is an efficient, functioning system that helps launder the money. We can get to that system and arrest the kingpins — it's an open secret now — but we simply choose not to. Our fight against corruption must open this can of worms.

    Banning the Rs. 500 note will only create problem for small businesses like vegetable vendors who have to carry cash around to buy things. It will create no problems for corruption — because the corrupt will still use cash and quickly convert that cash to white money. Banning such notes is the equivalent of the security theater we see in malls, where it seems the terrorist code of conduct is that you hide your bombs only in the boot or under the car's hood, nowhere else. Effectively a Rs. 500 note ban does nothing to deter corruption, but inconveniences normal people. In fact, it's better to probe every real estate sale in the last three years — there is surely more cash exchanged illegally there than in any other transaction. The money trail will reveal, in double-quick time, that the money gets whitened very fast.
    We're enraged about the colour of money, but the area is, in the most unfortunate pun ever intended, grey.



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  • #2

    #2

    Re : Dirty Money Is Not Just Black

    Originally posted by MANOJa View Post
    An real interesting, different article ( Comments, please )-

    And I say that at a macro level, we should be more worried about white money.

    Because RBI's statistics — they release this every week — say that the total amount of rupees in notes printed is about Rs. 10 lakh crores. Our GDP is about 80 lakh crores. Even if 30% of the total money printed was being hoarded as black money, it's about 4% of GDP. This is not small; but I argue that this is not big enough. I mean there is much more illegal money out there than 4% of GDP. And that also means the black money is being laundered into white money quite easily.
    You look at the massive demand for rented properties in Delhi/NCR region where the biggest and best known politician scamsters of our country live.

    People are ready to buy shops rented for bank ATMs and bank branches for as low as 5% return. After paying tax on rent the return is even lower. So why are people buying such properties? Simple answer is that if a property where bank branch is located is worth Rs 4 crores, in Delhi 80-85% payment will be made in cash and rest by cheque (white amount). This way traders/businessmen/politicians are able to launder their black money and are able to take advantage of slow but steady returns provided by RE as well as rental income in white which is taxed at lower rate after exemptions. This is a group of people which is aware that they will not need to take out the money by selling the property for long term or for the rest of their lives.

    So yes, it is too easy to convert black money into white money in our country.

    Finally tax to GDP ratio for India is about 17% while for developed countries in Europe it is close to 40% and for USA (with no federal sales tax and VAT) it is 26%.

    List of countries by tax revenue as percentage of GDP - Wikipedia, the free encyclopedia

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    • #3

      #3

      Re : Dirty Money Is Not Just Black

      Realty A Safe Bet For Politicians To Park Blackmoney

      Several Cabinet ministers, chief ministers and members of Parliament showed up at a wedding reception hosted by a builder recently.

      Nothing wrong with it, said areal estate insider, except that the presence of so many politicians at the invitation of a realtor was a proof of the proximity they enjoyed.

      It’s not surprising that the nexus or the quid pro quo between politicians and real estate players could, once in a while, result in exposes involving the likes of Bahujan Samaj Party ( BSP) supremo Mayawati or Robert Vadra, the son- in- law of Congress president Sonia Gandhi. A broker who specialises in cutting high- profile real estate deals in the national capital region told Business Standard there’s nothing unusual about the alleged business associations between the companies of Mayawati’s brother, Anand Kumar, and real estate players such as DLF, Unitech and Jaypee in Uttar Pradesh. “ It’s commonplace for politicians to park funds in real estate companies, as it’s a safe avenue and fetches the highest return,” he pointed out.

      And, if politicians need builders to park funds, realtors are keen on linkages with politicians, both in power and out of power. “ The politicians add value to any deal,” according to a consultant, who’s been tracking the sector for years. For instance, they could help speed projects and in some cases, get what is illegal converted into legal for clearances.

      According to media reports, Kumar’s real estate business grew significantly during Mayawati’s third term as chief minister of Uttar Pradesh ( 2007- 12).

      Advance given to companies for deals that never go through are the best way to convert black money into white, the source said, adding it was a popular method in the sector. “ The forever- appreciating real estate prices and the certainty of creating money out of thin air is attracting politicians to this business,” another industry source said. “ It seems like a no- risk business, except for the delay in getting licences in some cases.” While some industry representatives argued that metros and areas around big cities witnessed the builder- politician nexus the most, others said the trend was not geography- specific and that it was universal, as real estate meant big money. “It’s more rampant where transparency is less,” according to an international consultant, who did not want to be named.

      Realtors know it is very tough to do business without political backing, according to another prominent consultant known for mega deals. “ Large development is difficult without the local government’s help.” While it is a global phenomenon, the nexus is strikingly higher in the developing countries, he pointed out. In India, a large chunk of land holding is still with the government, regulatory mechanisms are not foolproof, laws are outdated and the government approval process is slow, the consultant explained.

      While Mayawati and her brother have denied any wrongdoing,




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