Black Money is in vogue again. On Diwali, Supreme Court Senior Advocate Ram Jethmalani just wrote a hard-hitting letter to India’s Finance Minister Shri Arun Jaitley regarding the issue of black money and flagged our Finance Minister’s incompetence, negligence and what could possibly be sins of omission and/or commission. This post attempts to bring context to the recent news on black money as well as give perspective to the economics and politics of black money in India.

Why is Black Money such a big deal, politically?

Prime Minister Narendra Modi’s top priority was to bring back the black money as he reinforced in every speech and rally during the election campaign leading up to the general elections in 2014. Here’s an example of a scathing attack he made on then UPA Chairperson Ms. Sonia Gandhi with respect to black money. The current Home Minister Rajnath Singh said that he would bring back the black money from foreign countries within 100 days. BJP leader Subramaniam Swamy even proclaimed:

To bring relief to common man, immediate measures have to be taken. And, I feel we should first abolish income tax during this period of inflation. India’s lost 1.76 lakh crore in 2G scam, 1.86 lakh crore in coalgate scam. There is about 120 lakh crore of black money in foreign banks. With this money we could survive for the next 60 years without collecting income tax.

The talk was loud. It was one of the main planks on which the current BJP-led government came to power. So, the seriousness with which the BJP government deals with this issue is rather important to note. If they’re not serious about it, there’s probably nothing from the campaign that they actually meant. And rather unfortunately, the current BJP government has not walked the talk. It has yet again, overpromised and underdelivered.

May 2014: The Election that Changed India, but not the status of Black Money

After the election of the new government, Ram Jethmalani, an open Narendra Modi supporter said that a senior minister was stopping investigations and creating big roadblocks. It wouldn’t stretch of one’s imagination to think that this Minister is Shri Arun Jaitley. Ram Jethmalani has criticized Arun Jaitley even in the past. When the SIT on Black Money was formed, he had this to say about him and now, Minister for External Affairs, Shrimati Sushma Swaraj.

On the legislative floor, BJP MPs like Nishikant Dube even publicly admitted that there was no way in which black money could be brought back to India. More recently, the government told the Supreme Court that it can’t release the names of those with black money.

During the UPA government, many supported the adjournment motion against black money, brought in parliament by Shri LK Advani in 2011. Shri Pranab Mukherjee, the then Finance Minister argued on the floor of the house that any disclosure of names would violate the understanding reached with sovereign governments. Many were then tripped into believing that it’s only the Congress which wants to conceal the black money and the identity of the holders of such money.However, the BJP which promised complete disclosure of information on the issue of black money is making a plea in the Hon’ble Supreme Court identical to the one used by the Congress in 2011 to safeguard the interests of black money holders. It is now doing yet another U-turn by indicating that it’ll disclose a limited number of names, cherry picked from the list of foreign bank account holders possessed by the government through formal/informal sources. The Finance Minister needs to make up his mind, once and for all.

What is even more astonishing is the fact that the Hon’ble Finance Minister, Shri Jaitley is misleading the country on this issue. The Indian government has been in receipt of two substantial sets of information of foreign bank holders of illicit money. One is pertaining to banks in Liechtenstein and other of HSBC bank of Switzerland.More on that later in this post.

Is Black Money a big deal, economically?



There are various estimates out there for the actual amount of black money that’s out there. Subramaniam Swamy said Rs. 120 Lakh Crore which is about $2 trillion. IMF Economist Dev Kar at Global Financial Integrity Institute pegs the number at $462 Billion from 1948-2008 with 86% of this amount is after 1991. However, this counts money only through banking channels. So this is a really small amount as compared to over-invoicing, under-invoicing and through hawala transactions. Governmental kickbacks are not taken up in this number, so while the number is big, the real number is probably much bigger. Professor Arun Kumar, author of “The Black Economy in India” and an economics professor at Jawaharlal Nehru University in New Delhi, has done an extensive calculation on the total amount of black money and pegged it at $2 trillion. Another Bloomberg report also pegs the hidden assets and black money number at $2 trillion. So, for argument’s sake, let’s go with this number.

It’s difficult to calculate but it’s clear that the black money in its various forms is a rather important issue for India. For comparison, India’s GDP is just about touching $2 trillion. So it is a big deal. You could technically fund all the planned expenditure (defence, health, education and everything) in India as proposed by Union Budget 2014, 7 times over without having to touch or raise any tax or non-tax revenue. It is enough to meet the MDG in 10 years and still have around $1.4 trillion left. {The World Bank estimates the costs of reaching the Millenium Development Goals at $60 billion per year.}

So, when the amount of money that India’s missing could eradicate extreme poverty and hunger, achieve universal primary education, promote gender equality and empower women, reduce child mortality, improve maternal health and combay HIV/AIDS, malaria and other diseases, ensure environmental sustainability and develop a global partnership for development, there is cause for much worry.

It could fund all this expenditure but as an MC Joshi Report on Black Money in 2011 noted, it’s probably going elsewhere:

The two major national parties (an apparent reference to Indian National Congress, BJP) claim to have incomes of merely INR5 billion (US$83 million) and INR 2 billion (US$33 million). But this isn’t “even a fraction” of their expenses. These parties spend between INR100 billion (US$1.7 billion) and INR150 billion (US$2.5 billion) annually on election expenses alone. And in this 2014, election, they have spent astronomical levels.

The Curious Case of Liechtenstein and Switzerland

Black Money is popularly associated with these mysterious foreign accounts with secret codes and Da Vinci code type protectors. The more accurate truth is that most of the black money is in India. However, since the popular notion is these foreign bank accounts, let’s study their legal grounding.

With regard to the information pertaining to bank accounts in Liechtenstein shared by the German government, the Hon’ble Supreme Court of India in its judgement on 4th July 2011 has made it amply clear that the argument that India’s 1995 agreement with Germany prohibits any disclosure of relevant documents and details doesn’t hold.

Shri Jaitely, Hon’ble Finance Minister, in his media address made a claim that the Double Tax Avoidance Agreement between India and Germany, signed in 1995 restricts the sharing of information only to cases where chargesheet has been filed. The Hon’ble SC had in its 2011 judgement not found merit in this claim and made the following observations:

Here is an extract of Para 56 of the judgement:

We have perused the said agreement with Germany. We are convinced that the said agreement, by itself, does not proscribe the disclosure of the relevant documents and details of the same, including the names of various bank account holders in Liechtenstein.

The Supreme Court then goes on to analyse the clause of the agreement which the government is pleading to be a hindrance for disclosure of information. Extract of para 58 of the judgement:

The above clause in the relevant agreement with Germany would indicate that, contrary to the assertions of Union of India, there is no absolute bar of secrecy. Comity of nations cannot be predicated upon clauses of secrecy that could hinder constitutional proceedings such as these, or criminal proceedings.

Extract of para 71 of the judgement:

The actions of governments can only be lawful when exercised within the four corners of constitutional permissibility. No treaty can be entered into, or interpreted, such that constitutional fealty is derogated from. The redundancy, that the Union of India presses, with respect to the last sentence of Article 26(1) of 47 the double taxation agreement with Germany, necessarily transgresses upon the boundaries erected by our Constitution. It cannot be permitted.

Extract of para 72 of the judgement:

We have perused the documents in question, and heard the arguments of Union of India with respect to the double taxation agreement with Germany as an obstacle to disclosure. We do not find merit in its arguments flowing from the provisions of double taxation agreement with Germany.

Another claim made by Shri Jaitely was that Germany has objected to revelation of names pertaining to Liechtenstein. This argument also doesn’t hold true as this information pertains to Liechtenstein, which is an independent sovereign state. The 1995 agreement between India and Germany has neither any jurisdiction nor any authority over information pertaining to banks of Liechtenstein.

Here is an extract of Para 56 of the judgement:

In the first instance, we note that the names of the individuals are with respect to bank accounts in the Liechtenstein which though populated by largely German speaking people, is an independent and sovereign nation state. The agreement between Germany and India is with regard to various issues that crop up with respect to German and Indian citizens’ liability to pay taxes to Germany and/or India. It does not even remotely touch upon information regarding Indian citizens’ bank accounts in Liechtenstein that Germany secures and shares that have no bearing upon the matters that are covered by the double taxation agreement between the two countries.

It is also pertinent to note that the Government has never ever revealed any evidence, either in court or otherwise, to effect that the German Government objects to sharing of information. This was also remarked by the SC in Para 59:

the Union of India did not provide any evidence that Germany specifically requested it to not reveal the details with respect to accounts in the Liechtenstein even in the context of proceedings before this court.

And finally the Supreme Court in para 56 goes on to say:

It is disingenuous for the Union of India, under these circumstances, to repeatedly claim that it is unable to reveal the documents and names as sought by the Petitioners on the ground that the same is proscribed by the said agreement. It does not matter that Germany itself may have asked India to treat the information shared as being subject to the confidentiality and secrecy clause of the double taxation agreement. It is for the Union of India, and the courts, in appropriate proceedings, to determine whether such information concerns matters that are covered by the double taxation agreement or not.

What does the United Nations have to say on this issue?

With regards to the sharing of information pertaining to HSBC Switzerland, the United Nations Convention Against Corruption (UNCAC)mandates the signatories to the convention to take several steps to help eradicate the problem of money laundering from the global economy.

Both India and Switzerland are signatories to the UNCAC which emphatically empowers the two countries on following counts:

UN Convention Against Corruption gives full sanction to make simple changes in the laws of our country to tackle black money menace permanently UN Convention Against Corruption overrides ‘bank secrecy laws’ UN Convention Against Corruption empowers to freeze, seize and confiscate illicit money UN Convention Against Corruption on Mutual Assistance by different tax jurisdictions

Therefore the remarks made by Shri Jaitely, in his media address- of the India government achieving a breakthrough with the Swiss government, Swiss Federal tax authorities now agreeing to confirm genuineness of documents, and initiation of discussion on a bi-lateral agreement between India and Switzerland on automatic exchange of information- were long ago well established by virtue of UNCAC.

It is also pertinent to note that the provisions of Double Tax Avoidance Agreement, which are being repeatedly pleaded as the sole reason for Central Government’s inability to share information don’t quite apply in the case of HSBC bank account details possessed by Indian authorities, as the same wasn’t made available to Indian authorities by the sovereign government of Switzerland. It was made available through other informal channels and therefore doesn’t fall under the ‘Exchange of Information’ clause of the Double Tax Avoidance Agreement between India and Switzerland.

Another prime instrument that has been used over the years to frustrate efforts of the Indian law enforcement agencies to bring individuals indulging in money laundering to book, has been the notion of ‘bank secrecy laws’ that were instituted in Switzerland and other tax havens, to protect racketeers from being exposed

Thankfully, the UNCAC recognizes the impediments that such laws may place in the way of law enforcement, and has, in several places, mandated that global public interest must override any such domestic bank secrecy laws.

Article 40 squarely deals with the impediment that bank secrecy laws may pose, and states:

Each State Party shall ensure that, in the case of domestic criminal investigations of offences established in accordance with this Convention, there are appropriate mechanisms available within its domestic legal system to overcome obstacles that may arise out of the application of bank secrecy laws.

Most importantly, Paragraph 7 and 8 of the Article 31 of UNCAC states:

7. For the purpose of this article and article 55 of this Convention, each State Party shall empower its courts or other competent authorities to order that bank, financial or commercial records be made available or seized. A State Party shall not decline to act under the provisions of this paragraph on the ground of bank secrecy. 8. States Parties may consider the possibility of requiring that an offender demonstrate the lawful origin of such alleged proceeds of crime or other property liable to confiscation, to the extent that such a requirement is consistent with the fundamental principles of their domestic law and with the nature of judicial and other proceedings.

So, what could have been done by the government to bring back or curb black money?

By making a few simple changes to the laws of our country, which possess full sanction by the UN Convention Against Corruption, one can severely curtail the flow of black money in this economy. Two sessions of parliament have passed and if this government were serious about tacking this problem in an effective manner, then some of the changes required to be made in our current legal framework as mentioned below, would have been made. Here’s a list of things that could have been done to improve status quo:

In Union Budget 2014 or in any Ministry of Finance announcement, no action was taken by the government on past requests by the CBDT (Central Board of Direct Taxes) to fill more than 30,000 vacant spots in our different financial intelligence departments, which could hunt down black money and tax irregularities. In the Union Budget 2014, It was particularly concerning to hear nothing about the revision or repeal of double tax avoidance treaties, especially with Mauritius and the usage of participatory notes in India’s financial landscape, both of which cause huge amounts of revenue losses. The Government of India received many interesting and innovative solutions when a White Paper on Black Money was submitted for perusal in Parliament in 2012. It said that lower taxes and simpler compliance process reduces black money . They said that this could be a method to ensure voluntary compliance amongst those with high net assets. A lot of black money can’t be touched legally and needs to be brought in through institutional reform. Removal of high transaction costs in vulnerable sectors like gold trading and real estate, where there is high incentive and cost saving to not pay taxes and thus, pay money in black . Real estate transaction process and tax structure needs to be simplified to get a bigger tax base. Credible deterrence for black money generators and storekeepers can be achieved by information technology (integration of databases), integration of systems and compliance departments of the Indian government, direct tax administration, adding data mining capabilities, and improving prosecution processes. A new law, or an amendment to an existing law (such as the Prevention of Money Laundering Act), requiring all Indian citizens to disclose all their assets and bank accounts in India and abroad needs to be introduced. Such a law would require citizens to annually disclose a full list of their assets and liabilities, including their stakes in companies or trusts registered abroad. Any income or assets that are not disclosed in the required form would be deemed to be “proceeds of crime”, and included as ‘predicate offences’ defined under the UNCAC. This would enable the law enforcement agencies to recover the said assets under provisions of the Prevention of Money Laundering Act, or the provisions of the UNCAC allowing for seizure and confiscation of assets that are proceeds of crime. Instruments such as participatory notes and anonymous investments by funds or shell companies could have been disallowed with immediate effect. Every time a company invests in stocks or other financial instruments in the Indian Stock Exchange or elsewhere, the relevant authority must be able to determine the exact ownership of the investment, ending in the final individuals who hold the money that is being invested. In the case of investments made in the name of a company or a trust, the major stakeholders of the company, or the trustees of the trust, must be determined and duly recorded, before the investment is allowed.

The black money issue in India has multiple facets which need to be solved in a comprehensive manner. The holders of these large amounts of money have vested interests that won’t allow them to let this money go, and power to ensure that it doesn’t. My worry is not the speed of the government’s progress, which they did, admittedly over-promise. My worry is the direction that the present day government is taking is in completely in the wrong direction. For their sake, I hope they course correct soon and deliver on the promise that Shri Narendra Modi made to the country. The 2014 elections were the biggest in terms of the sheer money spent by India’s political parties. Inaction on this issue will only indicate that it’s payback time.

Note: This post combines research done on Black Money by researchers of the Aam Aadmi Party. This does not reflect the party’s official stand. One part of the content (on the legal background and United Nation’s role) comes entirely from this post on Newsroompost. It was written by Raghav Chadha,with valuable inputs from AAP leader and Supreme Court Senior Advocate Prashant Bhushan.