Black money How to extinguish it

By Sabiomundo

In India black money has become subject of wide ranging debate and the most important issue of public protest against Government. When there is will there is way. The will to extinguish black money was evident when Indian Income Tax Authorities proceeded to tax income of Vodafone arising from sale of India based assets that was executed at tax haven of Cayman Islands. The sad fact is that there is no political will. Lack of political will is not confined to India. Global conglomerates that trade in capital and financial instruments weave a fine web across the globe to hide income from tax authorities world-wide. It is these same conglomerates that contribute to decisions on public policy and international treaties. The instance of lack of political will is evident in the agreement between India and OECD reported on 15-6-2011. India and OECD is reported to have agreed for enhanced tax cooperation and suggested measures that will provide greater certainty to both tax payers and the Governments. The statement indicates three presumptions. (1) The existing level of cooperation between India and OECD is inadequate. (2) Tax payers though are certain of liability to pay tax, greater certainty in the matter is sought to be achieved. (3) The Governments too has certainty in imposing tax. However, the agreement aims at achieving greater certainty. This agreement forebodes of devious ways to disarm Indian tax authorities from taxing income generated in India but stashed away to tax havens. [1]

SUGGESTIONS TO EXTINGUISH BLACK MONEY 1. INITIATIVE AT UN. OECD members, especially USA and UK have their own tax havens within their own respective territories. The tax haven of these two countries control other far flung and well known tax havens such as Cayman Islands, Bahamas, Mauritius, Panama, St Kitts and many others. At the root of tax evasion and tax avoidance is the OECD Model Tax Convention on Income and on Capital that replaced earlier League of Nations Treaty of 1928 that gave taxing rights to countries where income is generated. At international forums India and other like minded countries must strive to revive the UN draft model tax treaty which was prepared in 1980. The UN model tax treaty that provides for taxation at source countries is favourable to developing countries. It was OECD that opposed its adoption. Thereafter multinational corporations went far ahead beyond OECD model to absolve themselves from liability to pay tax anywhere. For comprehensive details of this other aspects of black money the book by Nicholas Shaxson - TREASURE ISLANDS Tax havens and men who stole the World- The Bodley Head 2011 - is very authentic source.

2. Bilateral dual tax avoidance agreements The bilateral dual tax avoidance agreements must be renegotiated in such a manner that competition between countries in taxation is avoided. The objective should not be to impose burden on tax payers. On the contrary the objective must be for bringing more transparency and certainty to tax payers and Governments. Each country has its own sovereign right to tax at whatever rate the respective country [2]

may choose to tax. The treaty must also recognise the right of each country to tax income generated in that country. The dual tax avoidance must be restricted and limited in such a manner that total combined tax paid in two countries does not exceed the tax rate of the country, where higher rate of tax is levied. For example, if India has applicable tax of 30 % while tax haven country has applicable tax of 2%, the tax payers total tax liability must not exceed 30%. 3. Transparency in transfer / movement of capital Multinational corporations operate globally. Their profit is derived from several countries. Capital is moved from one country to another. Financial result and transfer of capital between countries are relevant. There are foreign companies operating in India. Subsidiary of foreign company also operate in India. An Indian company may operate abroad or have subsidiaries abroad. All these types of companies must be required by law to file their global financial result and capital movement to Indian authorities so as to bring transparency. 4. Indian tax laws Indian tax laws must be made unambiguous to provide for taxation of all income generated in India.

5. Closing avenue for corruption Large scale corruption arise (1) when public assets are transferred to private entities; (2) when high value contract is awarded by Government; and (3) while awarding licence to operate any specific service to private entities. There is no one size fit all solution here. Public policy on case by case basis must be decided only after wide[3]

ranging debate and where necessary through referendum. As a general principle public assets belong to people. When such assets are sold, the price must be set through transparent process and finalised through public debate. Revenue from sale or royalty from prospecting must be shared equally with citizen all men, women and children of the country. The Government must use tax to meet expenses and

must not use sale proceeds of public assets to meet expenses. 6. Public policy Some times, the question arise, whether a particular development really address any specific public need. To illustrate an example, shipping conglomerates need huge size seaports to berth their huge size ships to load and unload cargo so as to maximise their profit from economy of scale. Countries having extensive sea coast such as India and United States are able to establish ports of optimum size closer to cargo generating hinterland. However, huge transhipment port is propagated as essential for development by shipping conglomerates. Indian shipping major SCI and other foreign shipping lines provide convenient direct call shipping service to importers and exporters for delivery of cargo direct to destination. Such direct call ships, which are smaller in size, do not need huge transhipment ports. Yet shipping conglomerates have had their way. There are several transhipment ports in South Asian Region - Colombo, Dubai, Singapore and Cochin. More are on the anvil such as Vizhinjam. The policy and legal environment is so lax that waterfronts, which

are unique public assets are given away free and huge public funds are squandered in creating such transhipment terminals. These transhipment terminals have already created buyers market in South Asia for shipping conglomerates leading to unhealthy competition between transhipment ports.

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In USA transhipment is not encouraged because the country has long coastline. New Port in Bahamas, which had ambitious plan to become futuristic transhipment hub to serve both US West and East coast, did not take off. The public policy here must be that the Government may offer operating right on waterfront land for commercial utilisation as transhipment port after obtaining public consent for use of the waterfront for this purpose. Public consent is essential because round the clock operation of transhipment terminal will cause dust, noise and other inconvenience to residents. The value of operating right on water spread and adjoining land must be incorporated as Governments share of capital in 50:50 joint venture, with private participant bringing his share of capital in cash. No domestic law must be relaxed or any concession such as tax break be given to joint venture company. If shipping conglomerates desire to maximise profit through economy of scale let them do that. The government must not provide waterfront land free and in addition, spend huge sum, as at present for no apparent benefit. 7. 2G, 3G spectrum Here, policy issues concerns the desirability or goodness of low cost. A low cost service to common people is good. 2G or 3G spectrum service if given at lowest cost is good for people. Spectrum is merely a means to communication. It does not cost the Government. It is public asset. The question is how to give away free of cost so that people and not the operator - stand to benefit through low cost access to communication service. Here the tender process must be used to get bid for service of specified quality from bidders qualified and experienced to provide the service. The financial bid must be for price proposed to be charged to end user. Price can be indexed to cost of living index. Whoever quote lowest price must be awarded operating licence subject to furnishing bank guarantee for reasonable [5]

amount as performance guarantee. If the Government requires generating any revenue from spectrum use it can be achieved by levying service tax. -----------16 June 2011

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