Black money—how much is it? Over the last few months, starting with the Global Financial Integrity (GFI) report on India, rumours have been rife that black economy in India is close to 50% of the economy. And that three-fourths of this money have flown out of India—capital flight—and found a safe haven in tax shelters abroad. The final draft of this seemingly authoritative report came out in November 2010 and was timed perfectly with the scam storm prevailing in India at that time. Recall that the story of the CAG report, and the Radia tapes, also broke in mid-November 2010. The cumulative effect of these events was to set the Indian government, politicians and civil society on fire. And not to be left behind, in response to a PIL, the Supreme Court has asked the government to release the names of the tax evaders with stashes abroad.
The BJP had first introduced the draft conclusions of GFI at the time of the Lok Sabha elections in May 2009. Led by the octogenarian LK Advani, the BJP thought this was an issue guaranteed to win over votes. It set up an in-house cell to study the draft GFI report and make recommendations. Bring back the black money, the BJP thundered. There were few listeners as the BJP suffered a large defeat. But now with the CAG's wild-eyed and wild estimate of Rs 1.76 lakh crore as the cost of the 2G scam, the claims in the GFI report have taken on a new meaning and urgency.
Bring back the black money to help the poor of India, the BJP thunders now. And this in-the-name-of-the-poor call has been applauded and duplicated by Rahul Gandhi as he thunders the same. For once, the right left and centre all agree that about 50% of India's GDP (around $500 billion) is stashed abroad and needs to be brought back. Think how much poverty all that will eradicate—and the government will be able to spend all this money on schools, hospitals, nutrition and the poor. All wrongs will be set right.
The ministry of finance has also joined in. The do-something-do-good euphoria has seized Pranab Mukherjee and he has promised to address the issue in the forthcoming Budget. He has called for research "bids" to study this important subject.
Clearly, the study of black money is an important issue. And tax evaders have to be punished. My estimate of black money in India is based on private income tax collections and details about the calculation as contained in Tax Compliance and Tax Rates*. And how much might total black money be in India in 2009? Only about Rs 1 lakh crore, and given the GDP of Rs 60 lakh crore, this is about 1.5% of GDP. These numbers are shockingly small and especially small compared to the GFI estimate, which seems to be universally accepted. The GFI numbers imply a black money flow of 7.5% of GDP every year, i.e., each year black money equal to 5 times my estimate flows into the Indian economy. Both numbers cannot be right. Which of these two numbers are closer to the truth?
The definition of black money is money that has some tax on it and is not declared. Besides personal tax, there are other forms of tax evasion—property tax, over- and under-invoicing of trade, and non-declaration of corporate income. No doubt, these forms of tax evasion are present but their magnitude pales in comparison to the magnitude of income tax evasion. For example, corporate income tax collected in 2009 was Rs 2.6 lakh crore, an amount suggesting very little tax evasion.
Some back-of-the-envelope calculations can yield an insight into the likely magnitude of black money from income tax evasion. In 2009, India's GDP was close to Rs 60 lakh crore; and income subject to income tax close to Rs 50 lakh crore. But this income accrues to the entire population, and even the poor. Only the top 20% of the Indian population has incomes that make them eligible to pay tax. And this 20% has 45% of total income. Thus, those paying tax receive Rs 23 lakh crore as income. It is inconceivable and outrightly wrong to think that a third of the income received as taxable income is evasion of taxes. The average personal income tax rate in India in 2009 was about 10%, i.e., the government should have collected Rs 2.3 lakh crore as tax. In 2009, it collected Rs 1.3 lakh crore. Thus the black money generated in 2009 was approximately Rs 1 lakh crore.
If the luminaries mentioned above are serious about their concern, then they should get ready to catch the aam aadmi taxpayer in this country—the one who earns less than Rs 10 lakh a year, and especially the ones earning less than Rs 5 lakh a year (and more than Rs 2 lakh to be eligible for tax payment). This is the "missing middle" amongst Indian tax payers. It accounts for more than two-thirds of the black money in India. And the aam aadmi pockets this amount of around Rs. 0.6 lakh crore or about 1% of GDP.
Screaming about non-existent money accruing to the rich will not make this money come alive. What will do so is a lowering of tax rates—something the UPA government had promised before it chickened out for lack of thought and clarity and guts to face those who live by fictitious numbers.
—The author is chairman of Oxus Investments, an emerging market advisory and fund management firm.
* For details about the calculations, see 'Bhalla, Surjit S, Tax Compliance and Tax Rates: India 1996-2010' in 'India on the Growth Turnpike, Essays in Honour of Vijay L Kelkar'
