Saturday, 22 March 2014

The Tax Amnesty That Never Came

(March 22, 2014)

I posted this  in's MMB  the day before the Union Budget of 2011. Alas, just like his previous two budgets this was a populist disaster. But the UPA II government still had support from their allies and could have pulled it through. I believed then that India's main problem was lack of cashflow and I still believe so.

Why Tax Amnesty is
the Only Way Out

By Uppai Mappla
27th February 2011

Tax amnesty has rightly been slammed as immoral. However, under the current financial circumstances, it could be even more immoral not to take advantage of this ready and certain source of capital.
As recently as November 2010, India was the darling of investors. But yesterday, Maplecroft’s much-followed World Risk Map showed India as the 16th riskiest country for investors!
      What a fall that was, my countrymen!
      We all know how Commonwealth Games and other scams made India seen suddenly as the dog with the most fleas. But investors had sort of agreed that the affliction could easily be shampooed away. Even persistent inflation, prospects of stagflation in Europe and inflation in the US were being downplayed by FIIs, as long as the promised 8-10% GDP growth could be delivered.
      What has suddenly rendered them truly fearful is the unexpected Arab crisis. No one—even visionaries like Marc Faber—anticipated the speed with which the revolutionary fire would spread among the entire Arab world. In anticipation of that, for the first time in history, Brent crude is at a significant premium to WTI crude.
      Now that the enslaved Arabs have awakened, oil prices might keep spiking up, this time not because of mere contango, but due to fears of decline in production and transportation. (In 2008 the case was different, it was due to the expected growth in the developing world.) Speculation could magnify this even higher.
      India could be hit right in the belly. Fertilizers, irrigation, food distribution, power production—everything essential will suffer. Large swathes of the country may face famine and mafia protectionism. Trucks and trains moving essential supplies from one state to another might be stopped and looted. Sons-of-the-soil could flare up. Maoism will look tame then!
       Gulf returnee NRIs could not only dry up forex inflow, but also exert unsustainable pressure on the labour market, especially in consuming states like Kerala, where there will be immediate reaction on migrant labourers, triggering a bloody backlash on Keralites employed in these states.
      This horror story may become a reality if oil prices spike to $150+ and if India doesn’t have financial cushion. Then the government’s projected deficit of 5%-5.5% for FY-12 will be laughable. Foreign institutional investors (FIIs) are sure to smell the disaster early and they will just unload their holdings all at once, in a carnage worse than 2008. The rupee will slump to all-time lows, making imports even costlier. God forbid, if monsoons too fail this year, with another bout of global crop failure, then goodbye growth, welcome recession—no, stagflation!
      The Government and its economists are currently in a dream world (as shown by the sickly sweet Economic Survey) of a growth-utopia. FM will most likely feed this to us tomorrow in his budget speech.
      There is only sure savior for India now—a robust and no-nonsense tax amnesty. Indians are said to have an illicit $1.5 trillion abroad, probably more. Add to this the bundles of currency notes (partly printed in Pakistan, I agree) plus the 15,000-20,000 tons of gold held within the country, all unaccounted, unused, un-leveraged. Compared to previous tax amnesty schemes, the present haul (even if it dislodges only 5% of the stash) will be spectacular, and turn us into an instant surplus economy.
     Money begets money. Foreign investors will suddenly return, wide-eyed about India story, and don’t be surprised if Fitch upgrades India two notches up to BBB+ with a positive outlook! (Currently our credit rating is BBB- with an unprintable outlook.)
That makes it NOW [Feb 2011] is the right time for a tax amnesty. Why so?
(1)             It will capitalize on the rising panic amongst tax evaders that their escape routes are being choked by new tax agreements, revelations by conscience-bitten bankers (which could spread like an epidemic, suicide-bomber-like), increasing efficiency of surveillance, core banking, integration of global financial flows, etc.
(2)             Increasing business opportunities in India for newly whitened money (which were not available in previous amnesties), lower taxation slabs and the possibility that the whitened money could be great investment opportunity could prompt hefty disclosures of black money and foreign money.
(3)             Most black money is being held by Congress politicians and their protégées. They fear that the next party in power will victimize them easily and effectively. They are sure to lobby the high command to twist finance minister’s arm.
(4)             If the government waits too late to declare a tax amnesty, say, the middle of the year, as a knee-jerk response to an increasingly violent Arab uprising, soaring deficits, and inflation, response will be tepid because by that time tax evaders would have lost some faith in Indian financial system. 

Due these reasons I believe that the Finance Minister cannot escape declaring a tax amnesty very shortly, either during the Budget Speech or thereafter. And I hope he takes this opportunity boldly with both hands and acts TOMORROW itself. 
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This work (text only) by Sajjeev Antony is licensed under a Creative Commons Attribution 4.0 International License.