‘Real Estate and Politics are Sources and Sinks of Black Money’

‘Real Estate and Politics are Sources and Sinks of Black Money’

Demonetisation is not enough to curb black money. Bring political parties under RTI Act to contain black money, says policy paper published by Pune think tank led by GST architect Vijay Kelkar

‘White paper’ cheque-mates black money

The Pune International Centre has narrowed down the focus for the Narendra Modi-led BJP government at the Centre on how to completely flush out black money from the economy. These are the key areas:

Political Parties and Corruption Election Commission of India (ECI)
 Under Section 29A of the Representation of Peoples Act 1951, the Election Commission of India has registered 1,646 political parties as of May 2014. These include 6 national parties, 39 state parties and 1,593 unrecognised parties. Of these, 464 parties participated in the 2014 polls. As of December 2016, 10 new parties were being registered. All 1,646 registered parties are eligible under Section 13A of the Income Tax Act to exclude
a) income from house property
b) income from capital gains
c) income from other sources
d) income from voluntary contributions for the purpose of determining income tax liability. The 1,182 registered unrecognised and dormant political parties provide avenues, in view of their tax exempt status, to be used as sinks for black money. The 464 registered parties presently do not make their accounts public, nor do all of them publish a list of donors contributing more than Rs 20,000.

Appointment of Lok Pal
After extended debate, the Lok Pal and Lok Ayuktas Act 2013 was brought into force in January 2014. The Act provides for the establishment of a Lok Pal for the Union and Lok Ayuktas for the states to enquire into the allegations of corruption against certain public functionaries. The Lok Pal has still not been appointed. Even with the Supreme Court monitoring this appointment, it has not been made at the time of writing.

 The ECI is not being proactive when it seeks legislative action from the Government for constraining the use of black money in politics. The ECI needs to take note of the Supreme Court order of 2nd May, 2002 which said: “Where the law is silent Article 324 of the Constitution is a reservoir of power to act for the avowed purpose of free and fair elections. Thus, the ECI can be proactive as it had been in ordering of filing of affidavits by all contesting candidates detailing their assets and liabilities and criminal antecedents.

 Another instance of the exercise of residuary power of the ECI was the implementation of the Model Code of Conduct.

 The Central Information Commission in its full bench decision of June 2013 held that the six national political parties have been substantially financed by the central government and therefore they should provide information under the RTI Act on all aspects of their functioning, including finances.

 A PIL was filed in the Supreme Court for the enforcement of this order. The Central Government opposed this motion through its affidavit arguing that “this would adversely affect the functioning of political parties.”

 The proposal to bring transparency in political funding has awaited consideration for the last 19 years. The Election Commission of India cannot afford to wait optimistically for this reform to be put in place. It should walk the road alone and invoke its inherent powers on this important issue.

Describing politics and real estate as the primary “sources and sinks of black money in India” a policy paper published by the Pune International Centre has recommended a number of collateral steps subsequent to demonetisation, to constrain the Black Money economy.

These steps would be necessary if the Narendra Modi Government’s thrust to constrain the black money economy is to be successful, the paper, by Dr. V. Bhaskar, member 13th Finance Commission, has said.

A noted economist and an ex-IAS officer, Dr. Bhaskar has worked previously with the International Monetary Fund, and at the ministries of finance, commerce and industries. He has acknowledged the inputs received from Vijay Kelkar, architect of the GST model and chairman of the 13th Finance Commission, and Pune-based economist Prof. Pradeep Apte, for an earlier version of the paper.

Published by PIC, the paper states unambiguously that politics and real estate are the primary sources and sinks of black money in India, the other sources being tax evasion, corruption and criminality.

One of its primary recommendations is that “all political parties should be compliant with the provisions of the RTI Act.” As a part of this effort, political parties should publish their accounts after they are audited by an CAG (Comptroller and Auditor General) approved auditor and submit details of all donations above Rs. 20,000 to the Election Commission of India (ECI), under their annual returns.

“When donations below Rs.20,000 exceed 20% of the party’s total receipts or Rs. 20 crore, details of all donations should be provided,” Dr. Bhaskar has noted. He has recommended that all parties which do not comply should be de-registered by the ECI to underscore transparency in the funding of political parties.

While the above steps need to be taken by the ECI, the central government needs to take steps to “effectualise existing anti-black money legislations and operationalise Bills already passed such as the Benami Transactions Bill, the paper said.

The Government also needs to scrutinize the list of pending, lapsed and proposed laws aimed at addressing black money, “bring them to an irreducible minimum” and then accelerate the enactment and implementation of these limited laws.

The paper has called for a review of labour laws so that more of the work force joins the formal sector,

constraining the generation of black money in this field.

Real estate and alcohol for human consumption needs to be brought under the GST base to incentivize more formal transactions in these two important sector.

The government also needs to adopt methodologies to limit the use of agricultural income as a black money refuge and effectively implement the National Litigation Policy, the paper has noted.

Speaking to Hindustan Times, Pune International Centre’s Honorary Director Prashant Girbane said the report by Dr. Bhaskar written after demonetization, has been published by the PIC. “The report would be sent to the government in the due course. It’s objective is to create public discourse and discussion,” Girbane said.

Following are the other highlights of the report:


Apart from tax evasion, Dr. Bhaskar has listed corruption involving the political executive and the bureaurcracy, and criminality as the major sources of black money. He has pointed out that increasing Government expenditure on infrastructure projects, irrigation schemes and social welfare projects, as well as allocation of natural resources to private parties for use “afford opportunities for the generation of illegal incomes.”

He has noted that corruption (tax evasion and misuse of power) is equally prevalent in the private sector, especially in the education and health sectors.

Organised and unorganized criminality in the form of crimes involving drugs, extortion, prostitution, and human trafficking generates resources which escape tax.

Sinks of Black Money

The primary sinks of black money in India are in the form of cash, bullion and precious stones, luxuries, leisure and entertainment industry, penny companies and dummy corporations, real estate, the “political ecosphere” and foreign holdings.

Black money generated through cash is often converted and held in the form of strong international currencies such as the US dollar and the Euro. However, given the vulnerabilities arising from its possession, “it is mostly converted to other sinks,” Dr.Bhaskar has stated.

He has pointed out that penny companies and dummy corporations are one of the major sinks of black money in India and barely six lakh of the 15 lakh registered companies file their returns under the Companies Act. Although the Enforcement Directorate has taken up large-scale, country-wide investigations into dummy companies, “covering all the registered companies remains a monumental task.”

Real Estate has been identified as a major source and sink for black money in India. While real estate, ownership of buildings and business services contributes about 10% to the GDP, the construction sector alone contributes about 8%. “This extremely significant sector needs focused attention by the Government to dilute its dependence on the black economy,” Dr. Bhaskar notes.

Alongside Real Estate, Dr. Bhaskar has drawn attention to black money generation in the political ecosphere in India, stating that it is generated in various forms to support contributions to most political parties. “To that extent, politics is a sink of black money where it is “retained”. At the time of elections and “political stress”, this sector becomes a source of black money “which is mainly spent on consumption, ironically, generating taxes for the government,” Dr. Bhaskar has noted.

Tax Agricultural Income

He has called for imposition of taxes on agricultural income while allowing for exclusion of of small farmers with incomes below a threshold of around Rs 10 lakhs per annum. Stating that very few states levy taxes on agricultural incomes, he has pointed out that often, agricultural income is used as a channel to launder black money holdings into white. “The lack of up-to-date land ownership and cultivation ecords compounds this opportunity. Thus, agricultural income, as long as it is not taxed will continue to be a sink for black money,” he has pointed out.

Black Money and Foreign Holdings

The paper points out that black money is also exported through tax evasion in international trade and hawala transactions. It is either invested abroad or “round tripped” to India through direct mechanisms like FDI (Foreign Direct Investments) or indirect mechanisms like Participatory Notes. While all of three mechanisms are illegal and can be addressed through existing laws, the paper states that weak implementation of the laws by the bureaucracy “dilutes the effectiveness of the existing laws.”

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