Black-money returning as export receipts

Source : S.Muralidharan:BL:24th Oct 2011

When black money can enter India through over-invoiced exports 

and participatory notes, VDIS will have few takers.

There was a time when exports were given a lot of tax sops — such as duty drawback, cash assistance and income-tax exemption, either full or partial — which tempted unethical businessmen to inflate their exports through over-invoicing or other means. Over-invoicing of imports is done to get a kickback from the obliging suppliers, especially those for whom access to Swiss and other convenient bank accounts is easy and laughably simple. Over-invoicing of sales and its variant, exports, on the other hand, is done to make legitimate the illegal money one has accumulated over the years.

INFLATED OR FAKE EXPORTS

At the height of fiscal indulgence to exports, there was a bizarre story doing the rounds. A crack team of sleuths headed to Dubai on a tip-off and their efforts were amply rewarded when the export consignment to that place from India, worth several crores, turned out to be a heap of rags neatly packed with layers of insulation and other material designed to give it the much-needed verisimilitude, and more importantly to ward off any attempt at opening the boxes!

This was the tip of the iceberg regarding the widespread practice of inflated or fictitious exports with an eye on the hefty tax benefits. Relentless pressure from World Trade Organisation saw the Indian government gradually withdrawing these benefits — sometimes in a phased manner. But the steady weakening of the Indian rupee over the last couple of months coupled with the government's threat to go after those who have salted away their ill-gotten wealth abroad has once again revived the practice of inflated or fake exports. Exports to Bahamas, of all places, has jumped 1000-fold from $2.2 million in 2008-09 to $2.2 billion in 2010-11, bearing out the sneaking suspicion that there is something amiss in the sudden soaring of exports all round.

Export of services lends itself to an easier manipulation of invoices, given the fact that, unlike goods, services are always unknown quantities. Who knows, several Indians may be waiting in the wings ready to proffer advice and consultancy for an exaggerated fee, all designed to bring back, duly laundered, the ill-gotten money stashed away abroad. The Indian government has recently entered into information-sharing agreements on tax matters with several recalcitrant nations allegedly giving sanctuary to crooks and criminals. Bahamas, incidentally, is one of them. India can, therefore, crack the whip and ask to verify whether all these so-called exports were real or fictitious, normal or overstated.

But if it chooses to wink at them, it would appear that it doesn't mind the shenanigans of actual or charlatan exporters in the smug knowledge that, after all, the country is getting precious foreign exchange.

In any case, the revival of the over-invoicing route to money laundering should have dampened sufficiently the enthusiasm of the government in going ahead with Voluntary Disclosure of Income Scheme (VDIS) II that seeks to exclusively address the problem of Indian money stashed away abroad.

Indeed, given this fertile and hassle-free route, no one would seriously consider pressing ahead with VDIS II. Further, a lot of water has flowed down the bridge ever since VDIS 1997 was implemented.

PARTICIPATORY NOTES

The Foreign Institutional Investors' (FII) scheme with its inscrutable Participatory Note (PN) feature enables round-tripping which, shorn of jargon, means Indian black money stashed away abroad coming back in the form of stock market investments, riding piggyback on foreign investors.

Mauritius, too, is a favourite money laundering destination for Indians with black money abroad in view of the tax exemption it confers to a Mauritius resident from tax on capital gains earned in India. With such relatively hassle-free avenues, perhaps not many would take the trouble of availing of the tax amnesty scheme, or its variant, VDIS II, supposedly on the anvil.

Investigation authorities in India have always been stymied in their work when their audit or investigation trail takes them beyond India. But the Indian government should, like the US government, read the riot act to the foreign governments indulging crooks and criminals. Better still, there must be pre-emptory strikes like abrogation of the patently invidious tax treaty with Mauritius and the scrapping of the attractive PN feature of the FII scheme.

The wily captains of industry in India have got for themselves a permanent amnesty scheme by getting written into the Indian income-tax law through the Finance Act, 2011, a hugely concessional tax of 15 per cent on dividend received from foreign companies. The government cannot be seen running with the hare and hunting with the hounds.

(The author is a Delhi-based chartered accountant.)