Looking to fulfil the campaign promises of the 2014 Lok Sabha election, Finance Minister Arun Jaitley announced a slew of measures to rein in black money in the 2015 Budget. The centerpiece of this was a new law to deal with undeclared bank deposits outside India. Other measures include a new law to deal with domestic black money invested in benami property, curbs to discourage the use of cash and mandatorily linking PAN numbers with high-value transactions of over Rs 1 lakh.

These measure come in the wake of last month's Delhi elections, during which the opposition and specifically Aam Aadmi Party chief Arvind Kejriwal attacked the Modi government for the lack of movement on its promise to bring back black money from outside India.


Cracking down 

“Tracking down and bringing back the wealth which legitimately belongs to the country is our abiding commitment to the country,” Jaitley said in his budget speech, as he introduced the features of the law to deal with black money hidden abroad.

According to the new law, concealing foreign assets will be punished with imprisonment of up to 10 years and a financial penalty of 300% of the normal tax amount. Jaitley also proposed to amend the Foreign Exchange Management Act, 1999, to include a penalty provision allowing the government to seize assets held in contravention of FEMA and imprisonment of up to five years. Till March 31, 2012 – 13 years since it was passed – FEMA had a little more than 23,000 cases registered under it, with penalties of only Rs 1,678 crore.

This illustrates that while black money abroad might be a livewire topic, politically, there has been very little action on the legal front.

Too draconian

However, critics of the Jaitley-proposed law claim that little will change even now. In fact, the bill is being faulted for being too draconian and giving too much power to the government.

Congress leader, Manish Tiwari compared it to the Foreign Exchange Regulation Act, 1974, telling the Hindustan Times that the proposed bill would “put a huge amount of power in the hands of the Enforcement Directorate, which is really not known for its outstanding probity”. FERA, introduced by Indira Gandhi, put in strict restrictions on dealings that involved foreign exchange. Its most famous victim was the Coca-Cola Company, which was forced to leave India since it refused to dilute its stake in its Indian unit as required by the act.

But Jaitley's proposal might have a misplaced focus. The budget places great emphasis on curbing black money that has been deposited abroad. Far less attention was paid to the issue of domestic black money.  All Jaitley said on this score was that a new law to “enable confiscation of benami property and provide for prosecution” would be bought in. He did not think it worthwhile to expound on the matter or explain how this was to be done.

This is, of course, understandable from a political point of view: illegal deposits abroad have caught the political imagination far more intensely than black money in India. Whole election campaigns are conducted around black money “stashed away” abroad, bringing to mind people in ski masks and wads of notes in duffel bags. “Stashed” was also the verb of choice for the finance minister during his budget speech.

Domestic black money

However, a number of commentators have argued that most of the black money generated in India isn’t spirited off to Switzerland or any other foreign country: it’s sitting right here under our noses in the form of real estate. Economist Ashok Desai writes that “property undervaluation is the commonest form of black money in India. It is so common that no one gets worked up about it.”

As a result, India has an unusually low property tax to GDP ratio: 0.5% as compared to 1.2% for the BRICS and 1.9 per cent for the G20. To be sure, this is a problem that Arun Jaitley did promise to tackle by introducing a new Benami Transactions (Prohibition) Bill. But the almost perfunctory mention of it compared to the excessive attention paid to black money abroad is maybe not a good sign. Moreover, given the close relationship between politics and the real estate industry  in India, meaningful action on this front could be tough.