The Case of the Missing Millionaires

The Case of The Missing Millionaires

The government's decision to slap a super-rich surcharge on people earning Rs 1 crore, or a little less than $200,000, was seen by many as an answer to Warren Buffett's repeated calls for the world's rich to pay more in these times of crisis.

However, when the figures were called for, stumped taxmen realised that India's $1.9 trillion economy had just 42,800 people who admit they earn more than Rs 1 crore!

Obviously something was wrong somewhere. A top revenue official in North Block admitted that even Lutyen's New Delhi should have more than this number of people earning the magic Rs 1-crore-a-year figure.

A Credit Suisse report on Global Wealth for 2012 estimates that there are at least 1.58 lakh dollar millionaires in the country.

A KPMG report places that figure at 1.25 lakh Indians with an investible financial wealth of more than a $1 million (Rs 5.4 crore). Anecdotal evidence shows that even these wealth researchers could be under-estimating the numbers.

Car makers Mercedes, BMW and Audi reported a combined sales of nearly 26,500 cars in India in 2012. Their cheapest cars sell for Rs 27 lakh. Not hard to surmise, a person who buys a car that costs that much would be earning at least three to four times that figure.

Some 5,000 luxury flats in Indian metros were sold at prices ranging between Rs 3 crore and Rs 10 crore, according to realty researchers.

The National Institute of Public Finance, the government's think-tank, has recently submitted a report to the North Block on the amount of "missing millions" or black money which rotates in the Indian economy. It estimates black money at about 20 per cent of the Indian GDP, which would place it at $380 billion.

Where did the millionaires disappear?

Millionaires Club

Earlier this week a news portal did a sting operation on several leading banks and accused them of laundering un-taxed income. The banks, which included some of India's top lenders, rebutted the claims, but did suspend a number of managers for violating norms.

The biggest generator and recipient of black money is the realty sector, say taxmen. Most housing projects are sold at at least double the reported price. Construction costs are rated down by 25-30 per cent.

A second sector is gold. Though not much black money is generated in the bullion business, the amount of unaccounted income invested in gold is estimated to be high, aggravating India's natural appetite for the yellow metal. The World Gold Council estimates that Indian households have some 20,000 tonnes of gold worth $1.16 trillion ' more than double the gold reserves maintained by the US Federal Reserve.

Another segment that taxmen track are exporters, including India's much touted software exporters. Over-invoicing and under-invoicing of sales abroad generate money, which is routed through paper transactions in tax havens such as Mauritius back into Indian markets.

Similarly, studies into investment in stock markets show that Mauritius-based Foreign Institutional Investorss and sub-accounts' outstanding investment in Indian stocks stood at a whopping $56 billion as on April 30, 2012 ' the highest inflow from any single country into India.

Taxmen reckon that some of it is genuine investment from third countries routed through Mauritius to take advantage of zero taxes on the island nation and its double taxation avoidance treaty, but also believe a large portion of it is Indian money coming back into India.

Where to Invest the Untaxed Millions

"India is the country that these people understand best and it also offers high returns on investment. The BSE Sensex itself gave a return of 25.7 per cent in 2012, one of the highest anywhere, so it's but natural they would like to bring back unaccounted income back home for investment," revenue officials said.

Revenue officials have been asked to look into some 1.2 million transactions made by people who do not file tax returns but have spent huge amounts on credit cards, purchased property worth more than Rs 30 lakh, parked more than Rs 1 lakh in savings accounts or bought high value mutual funds or bonds.

Some 1 lakh tax queries have been sent out since the year began. More would be on their way. Not all of it will yield results, but then someone has to find India's missing millionaires.

India's Budget bets on Growth

Who will be the PM?

For a man, whom many see as Congress’s possible Prime Ministerial candidate next year, finance minister Palaniappan Chidambaram’s 8th budget was without what markets call the wow factor – nothing to perk up business, nothing much to make the middle class voters happier.

However, as in any pre-election year budgets, Chidambaram’s budget will try to spend its way out of the mess the Indian economy is in, by splurging on an all time record budget of Rs 16.65 lakh crore, a 16.5 per cent increase over the current year’s spending. In dollar terms India’s budget spend of $ 314 billion equals one and a half times’the entire economy of neighbouring Pakistan.

India is expected to grow by 5 per cent this fiscal year, far lower than the 8-9 per cent GDP growth it posted for most of the last ten years. GDP figures released today for the October-December 2012 quarter were a dismal 4.5 per cent, putting pressure on the government to opt for aq tough budget which aims to grow the economy “out of the trough”. Chidambaram in his budget speech, underlined his plan as one of “unhesitatingly embrac(ing) growth as the highest goal” to manage what he termed as “challenged” Indian economy.

India's Rich will have to pay more tax

New taxes including a `Super Rich’ surcharge on individuals earning more than Rs 1 crore ($185,000) a year and firms earning more than Rs 10 crore ($1.85 million), applied in token deference to an idea floated by Left-wing economist Joseph Stiglitz and nearer home by India’s leading philanthropist Azim Premji, and higher revenues churned out by an economy which the government hopes will grow at a faster pace of over 6 per cent are expected to fund the splurge. As also a record borrowing plan which hopes to raise Rs 5.42 lakh crore from the market.

There were however prudent cues to satisfy global credit rating agencies such as Moody’s and Standard & Poor, who had been threatening to downgrade the slowing down Indian economy beset with widening fiscal deficit, widening trade deficit and falling rupee.

India wants more butter now

Subsidies will be pared from Rs 2.31 lakh crore next year from the bloated subsidy bill of Rs 2.57 lakh crore which the government ran up this year, a compression of 10 per cent on what many see as populist spending on subsidising auto-fuels, food and fertilisers. The main axe will be felled on oil subsidies which is being reduced 26.8 per cent. Even the government’s borrowing plan has been kept `modest’ with an increase of about 4 per cent over amount borrowed this year.

Spending on non-economic activities such as defence will be kept down. For the first time in years, increase in defence spending was kept at just 5 per cent. Defence spending went up to Rs 2.03 lakh crore or $ 38 billion (for comparisons, a fifth of Pakistan's economy), from the Rs.1.93 lakh crore outlay for 2012-13.  

However, the lack of any specific spark in the budget and higher taxes on corporates and MNCs left Chidambaram's cheer-boys in India Inc, not so happy, which they made clear in interviews on television channels.  Bombay Stock market's Sensex fell 1.52 per cent or by 290 points. Markets seemed to have been spooked by the finance minister’s clarificatory amendment introduced as part of the budget, that residency would not be enough to get the benefit of double tax avoidance treaties with tax havens like Mauritius to avoid paying tax in India. Businesses and investors in India would also have to prove that beneficiaries of the investment funds were residents of the tax havens. (Something he said would be addressed the very next day, leading to a modest claw-back in the BSE )

Sensex went down after the budget

India’s leading commodity market, MCX, too reacted negatively to a 0.1 per cent Commodity Transaction Tax, re-introduced after being brought in and rolled back 4 years back, on non-farm products. The metals index went down by 0.3 per cent. Interestingly, perhaps fearing calls for a similar roll-back, the finance ministry has however not budgeted for any tax earnings from this score.

Bringing in more taxes home, is very much part of Chidambaram’s growth plan with revenues expected to grow by 19 per cent, with services tax being most buoyant, growing at 35.7 per cent, possibly on the back of a tax amnesty announced for those evading service tax. 

The government is also betting on more disinvestment earnings. Against this year’s Rs 24,000 crore expected to be realised from disinvestment, the government hopes to earn a a specific rs 55,814 crore from share sales this year, including possibly from selling the government’s rump stake in Hindustan Zinc Ltd. Similarly the government has set an ambitious target of raising Rs 40,000 crore from telecom spectrum auctions and one time spectrum fee despite spectrum auctions having been a flop this year. 

Road Eastwards

To spur investment, the Harvard educated, right-wing finance minister announced that plan spending on large public investments on highways, railways, ports, airports, power transmission lines etc., will be raised to Rs 55.5 lakh crore from Rs 42.91 lakh crore spent this year, an increase of some 29 per cent on actual spending. Firms investing more than Rs 100 crore would get 15 per cent extra tax benefits, infrastructure debt funds would be encouraged to fund ambitious long term plans and the World Bank and ADB roped in to help build an expressway linking India’s North east with Myanmar and thence on to Thailand, Malaysia and Singapore, India’s big markets in the Asean. 

Two new industrial corridors or expressways with industrial zones on either sides, one linking Bangalore with Chennai and another Bangalore with Mumbai, and new mega ports at Sagar in West Bengal and Andhra Pradesh were also among projects with which Chidambaram hopes to spur growth.

The bet will however be on growth and if that does not come about then Chidambaram’s gamble of higher revenue earnings could well fall by the way and the man who gave dream budgets to India Inc., some years back could well be the man who scripted a nightmare for the country’s economy already overburdened by high inflation, slack demand and rising debt.

Will Chidambaram Manage to Clean up the Economy?

When P. Chidambaram took over as finance minister of India for the third time on July 31, last year, he inherited a slowing economy, high inflation rates and an acute state of policy paralysis.
Though the Harvard educated, right-wing minister has kicked in a few reforms – liberalising foreign investment rules in a retail and aviation, bringing out new bank licensing norms, cut oil subsidies, and generally tried to stem the rot by getting cabinet to clear long delayed projects, the story remains the same – India’s economy is still in a mess and perhaps in some respects in a worse mess.
India grew at 6.5 per cent in 2011-12, the last year that Pranab Mukherjee ran North Block. In the current fiscal, under Chidambaram’s watch, the economy is expected to grow at 5 per cent, a straight growth slowdown of 1.5 per cent.
The fiscal deficit, or the gap between what the government spends and earns,  which Chidambaram has bravely tried to rein in by pruning not only wasteful subsidies but also defence spending, is still going to be 5.3 per cent of GDP. When that figure is coupled with state government deficit, the actual deficit of the government sector would amount to a high of 8-9 per cent of India’s economy. To put it in perspective, India’s fiscal deficit is three fourth’s the size of Pakistan’s entire economy.
This obviously means, that despite pressures from party colleagues, Chidambaram will have to be cautious about spending splurges and better at garnering revenues – which stand at a tad below 18 per cent of GDP (with taxes contributing to just half of the earnings) compared to 35 per cent for Brazil, 38 per cent for Russia, 39 per cent for the UK and 28 per cent for the US, not to speak of the 40 per cent of GDP which the Germans manage to collect. Of course, part of India’s dismal tax collection ability comes from the fact that a mere 2.5 per cent of its population pays taxes. The rest simply say they don’t earn enough to cough up any money. But then this is a year which runs up to a General elections, next year, and most of Chidambaram’s colleagues still suffer from a hangover of Socialism inherited from Indira Gandhi’s rule. Checking populist spending will be one tough task – especially when India showcases it’s `Right to Food’ bill which could sap up more money in subsidies from the budget than any other. 
Chidambaram will certainly have to work harder to earn more. One way would be to fast track the Goods and Services Tax. Another to  cut out various exemptions which corporates’ enjoy, roll back some of the excise and service tax cuts given to industry in the post-global meltdown period. A surcharge on the incomes of the `super rich’ is considered highly likely as is a commodities transaction tax on the lines of the securities transaction tax, to partly generate taxes and partly regulate a wildly oscillating commodities market.
This year, sales of shares in state run lumbering giants like  NTPC and Oil India, could not earn the government its targeted Rs 30,000 crore. But Chidambaram will probably bank on an improving stock market to try earn more from aggressive sales of PSU stocks. Similarly, poor appetite for a badly managed auction of radio-waves fetched India less than Rs 10,000, a fourth of its targets. North Block in conjunction with Sanchar Bhawan, home to the telecom department, will certainly try again.

NTPC Power Plant

Last year, the country’s current account deficit or the difference between the dollars, Euros and Yens we earn or which flows in by way of investment or debt and dollars, Euros or Yens we spend on importing oil, gold, jet aircraft and power plants, bloated to 4.2 per cent of GDP. The Reserve bank of India, tasked with managing our foreign exchange reserves, considers this to be alarmingly higher than what is prudent, which pundits at the central bank say should be 2.5 per cent of GDP.
This year that current account deficit figure is likely to be 5.2 per cent, far bigger than what Mukherjee had left the country saddled with. To put it in perspective, in 1991, when India ran into its worst foreign exchange crisis forcing the country to pledge gold to pay off impending debt closures, India’s CAD was 3 per cent of GDP. India’s rising import bill and weak exports has seen the rupee value falling from about Rs 44 to the dollar in April 2011 to over Rs 53 to the dollar as of today.
No wonder that earlier this week, Moody’s rating service warned that India’s widening current account deficit and the spurt in its external debt meant the country risked a downgrading of its credit rating  outlook.
Last year, under Mukherjee’s watch, India had received a similar threat from Standard & Poor’s  which had announced there was a one-in-three chance of a sovereign rating downgrade to junk status, leading to much consternation at North Block. Given that India’s total debt to GDP runs at a high ratio of 70 per cent, similar to the United Kingdom’s whose rating was cut today by Moody’s, India needs to perk up and try attract more dollar and Euro inflows.
This should mean more sops for foreign investors, more easing of rules for debt inflows, perhaps Sovereign status for rupee denominated bonds to be issued by public sector companies (but paid for in dollar or Euros) and certainly more concentrated attempts at encouraging value-added exports.
Not to speak of steps to stall the import of more gold, the single biggest item of import after oil and to check import of cheap telecom and power gear by posing higher taxes on them or by encouraging local manufacture of substitutes. India had last month raised import duty on gold and platinum to 6 per cent from a previous 4 per cent in a bid to break the country’s huge appetite for imports of gold. However, what the Reserve Bank and finance ministry would like to see would be a scheme to monetise India’s estimated 20,000 tonnes of gold reserves worth around $ 1.16 trillion, stashed away in household hoards.
One way out, could be gold banks, suggested by the RBI, to collect household gold against bonds, whose value went up or down with the value of bullion.  The gold so gathered could be on lent to jewellers, reducing imports.

India's Gold Obsession

Chidambaram will also have to be mindful of the savings rate which has been falling like never before, putting at doubt India’s ability to reach the professed goal of 9 per cent GDP growth. The RBI estimates household savings have plummeted to 7.8 per cent this year from 12.2 per cent in 2009-10. North Block, many aver, will certainly be looking at ways of encouraging middle class Indians to save more by giving larger tax breaks for pension and insurance products and to buy houses. Some say total exemptions for the `aam admi’ could well go up to a princely sum of Rs 3 lakh.
But then, how much the scion of the Rajah's of Chidambaram will risk and how much he will bow to popular sentiments will be something which will be revealed in just a couple of days.

Vodafone Again

With a new dispensation in North Block’s  all important revenue department, the Finance Ministry has in flurry started a long overdue  move to try and get in more Moolah by closing old high value cases like the Vodafone one.

After a five-year slugfest in courts that produced an adverse verdict for the revenue department, the government tried to undermine the effect of the verdict through a 50-year retrospective amendment of the Income tax Act. The move rattled foreign investors and raised serious questions about the notions of fair play and India's respect for court verdicts.

The case arose over the revenue department's move to gouge out $2 billion in taxes from a $11.2 billion deal between two overseas entities - Vodafone International Holdings, a Dutch subsidiary of Vodafone Plc, and Hong Kong-based Hutchison Whampoa and its associate firms.

On Friday, Vodafone India chairman Analjit Singh met finance minister P. Chidambaram, fuelling speculation that a rapprochement was imminent.

The latest initiative from North Block suggests that an old truce offer, which was made about a year ago, has been revived. Under the terms of this offer, Vodafone will have to pay the original tax without any penalties or interest, which the government had threatened to invoke by treating it as an assessee in default. The tax payout could work out to Rs 8,000 crore instead of the Rs 11,000 crore initially demanded, or the Rs 20,000 crore which the government had at one stage threatened to seek.

Chidambaram has asked expenditure secretary Sumit Bose to take over the crucial revenue department to tone down the fulsome rhetoric of its previous secretary who was insisting on the implementation of the general anti-avoidance rule (GAAR). This is a new-age tax measure that developed countries in the west have started to experiment with to stop foreign investors from using elaborate corporate structures and a fund trail passing through a number of tax havens to minimise tax payouts in the country where the income originates. The move to introduce GAAR from April next year had spooked foreign investors who were considering opening ventures in India.

Sources say revenue officials made a strong case that letting Vodafone off the hook would affect a number of other cases. These include the Idea Cellular-ATandT deal, SABMiller's buyout of a 100 per cent stake in Foster's India, and General Electric's sale of its majority stake in Genpact in a $500 million deal.

They argued the total notional loss  to the exchequer may well be in tens of thousands of crores of rupees, something which could well roll into another major controversy, especially if an activist Comptroller and Auditor General took up issues with the government on this.

The government needs to mop up Rs 10.75 trillion in direct and indirect taxes and with the economy going through a slowdown, it’s not yet certain whether tax targets will be met.

The other problem was that the Government had passed a law amending Section 119 of the Income
Tax Act and to repeal it, the move would have to come up before Parliament where the government could well be pilloried for first asking for this all important change and then for seeking to repeal it in a move which could be interpreted to help one single company.

Vodafone which obviously is a long term player in the Indian market which has proved extremely lucrative for it, now seems to favour coming to some kind of a peace deal with the government and has recently said it would consider making a provision against the legal risks of its Indian tax liabilities. The British telecom giant has plans to invest upto $ 4 billion in new telephone licences which are to be auctioned.

 

Plugging the Mauritius Route

The Stock Markets are not exactly with this googly. In fact the free fall on the BSE despite a reduction in the securities transactions tax soon after the budget, was mainly on this count, regardless of what your television analysts are telling you.
Finance Minister Pranab Mukherjee has finally done what everybody has been demanding should be done for a long time but never had the guts to do – plug the Mauritius route for round tripping.
Mukherjee managed to slip it through, by a simple amendment to section 90 and Section 90A  of  the income tax law, a clause which says that an entity cannot claim benefits of a tax avoidance treaty signed with a tax haven, just by “submission of a tax Residency Certificate containing prescribed particulars”. The firm or individual has to prove that it does really do most of its business there.
India for long, was trying to plug a loophole in its tax laws by which firms used to round trip through Mauritius to buy and sell shares here while avoiding paying capital gains. By declaring they were Mauritan residents they could avoid payiong any tax all as India has Direct Tax Avoidance Agreement with the zero tax island nation.
Mauritius consequently has been a funnel for pouring investments into India, some of which were perhaps shady. India had started talks with the island country on renegotiating the treaty but Mauritius officials were not exactly happy about anyamendment to the tax treaty which could affect investments into the island country, and were for long dragging their feet over it. 
Mukherjee simply circumvented these long drawn out negotiations and attacked the opportunist money which was often being routed through these islands, avoiding Indian taxes. The legal tweak is expected to address concerns that investments into Indian stock market are often routed through Mauritius to avoid short term capital gains tax of 10 per cent. About 40 per cent of all foreign institutional investments coming to Indian bourse are routed through this tiny Indian Ocean island.
Finance ministry officials point out that foreign institutional investors who have kept shares with them for more than a year will not be affected by the changes in rules as there is zero tax on any share sold on bourses after being kept for a year. Short term capital gains stand at 15 per cent, while off-market deals which is the preferred route when one company acquires another such as the Hutch-Vodafone deal, attracts 10 per cent tax.
Pranab babu's move to plug the tax haven loophole also addresses concerns that Indian firms are often bought or sold outside the country, simply to avoid paying taxes here. Remember the Vodafone tax case which the government lost? Hutch sold its mobile phone operations through a complex overseas tax free deal to Vodafone and both sides refused to pay income tax to the government.
Even in Cairn India’s case, initial reports suggested the deal to sell the Rajasthan oil and gas fields could be offshored, where again the Indian government would lose out on taxes.  Other transactions over which the finance ministry is anxious to get its `pound of flesh’ include the Idea Cellular-AT&T deal worth $150 million, SABMiller's purchase of  100 per cent shares in Foster's India and General Electric (GE) sale of its majority stake in Genpact in a $500 million deal.
What tax authorities want is that firms who want to benefit from Mauritius’ and other tax havens’ zero tax status should show two things – that they are genuine residents of these tax havens and do not do earn most of their revenues in India, which means they are not shell firms registered in tax free isles.
The Mauritius route for investment is an important one for India too and it too does not want to kill the golden goose altogether, though it is to be seen how the move will impact this. Foreign direct investment flows into India from the island nation totalled $55.2 billion, about 42 percent of the total $133 billion during that period.
A General anti-avoidance rule, which allows tax authorities to declare any business deal to be an ‘impermissible avoidance arrangement’ if part or whole of the deal has been crafted with the intention of obtaining ‘tax benefits’, too has been brought in along with these amendment. In essence it becomes an adjunct to amendment to Section 90 and 90A to plug tax leaks by routing investment through tax havens.
It speaks of four tests by which taxmen would determine whether any business deal through tax havens has been done just to avoid paying tax or whether they were bonafide ones.
The four tests are: the arrangement creates rights and obligations which are not normally created between parties; it results in ab use or misuse of tax laws, it lacks commercial substance and is done in a manner which is not normally employed for bonafide purposes. These tests make it virtually impossible for firms to use tax havens to buy or sell Indian assets.
Politically, it was important for the Congress-led government to go forward with this move to scotch opposition accusations that its soft on black money generation. Last year, not only did activists like Ramdev and Anna Hazare target the government over black money, the BJP started a nationwide campaign on the same issue.