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ANACCOUNT OF UNACCOUNTED
MONEY IN INDIA
This presentation deals with
concepts related to
unaccounted income,
followed by sector specific
analysis and finally,
generation and utilisation of
unaccounted income due to
graft.
Takshashila
Discussion Document
November 21, 2016
Prepared by:
Anupam Manur
ManasaVenkataraman
TheTakshashila Institution
2|
Unaccounted economy in
India
Unaccounted economy includes a combination of illegal economy, unreported
economy, unrecorded economy and the informal economy.
Illegal economy comprises of income generated by economic activities that are in
violation of legal statutes defining the scope of legitimate forms of commerce.
Unreported economy comprises of economic activities that circumvent or evade
fiscal rules as set out in the tax code.
Unrecorded economy comprises of economic activities circumventing the
institutional requirement of reporting to government statistical agencies.
Informal economy is not taxed and hence not accurately monitored by government
agencies.
Unaccounted economy comprises of transactions
and incomes on which due taxes have not been
paid and is not reflected in any other statistics on
economic activity within the country.Thus, it is
equivalent to income that is unreported in GDP.
3|
Unaccounted Economy in
India
Thus, apart from income earned through illegal
means, the term unaccounted income includes
legal income concealed from public authorities to:
— evade payment of taxes
— evade payment of other statutory
contributions
— to evade compliance with the provisions of
industrial or other laws
Illegal,Unrecorded,
Unreported andInformal
Economy
4|
Stock vs. Flow Stock Vs. Flow (Unaccounted wealth vs. income)
Incomes are flows generated during any given time period, while wealth relates to the
stock at a particular point in time.
Unaccounted wealth can be defined in two ways. First, the amount of wealth not
reported for the appropriate tax liable and second, the accumulation of unaccounted
income over a period of time.
Unaccounted wealth is tough to measure or estimate due to a lack reliable measures of
accounted wealth to begin with.
DomesticVs. Foreign Unaccounted incomes
Unaccounted wealth exists both within and outside the country, in jurisdictions which
are ‘non-transparent’ and in forms which do not reveal the actual owner of the
resource.
UtilizationVs. Generation of Unaccounted Income
The generation of unaccounted income relates to the suppression of scale of economic
activity through an increase in corresponding expenses or through a reduction of
reported sales.
Utilization of unaccounted income refers to the expenditure incurred out of unaccounted
incomes, such as expenditures on purchase of assets like gold, precious stones, real
estate, and other commodities.
Incomes are flows generated during any
given time period, while wealth relates to
the stock at a particular point in time.
5|
Share of Unaccounted
income in India’s GDP
69.6
66.2
49.4
45.2
41.7
0
10
20
30
40
50
60
70
80
Share in total GDP
1980-81 1990-91 2000-01 2004-05 2009-10
Estimates of unaccounted income in India varies
greatly with different estimation methods and there
is no consensus on the estimate.The range is from
25% of GDP to 75% of GDP for 2009-10.The
numbers used here are from a study from NIPFP[1],
which uses “State Space based estimate”.
Therehasbeenasteadydeclineintherate of
generationofunaccounted moneyinIndia.
[1] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
6|
Size of Unaccounted Income
Multiple Estimation Methods, Multiple Estimates
The size of unaccounted income in India depends upon
the definition of unaccounted income and within that,
the method chosen to estimate it.
Measures that look only at income that is unrecorded for
tax tends to be much smaller. For example, estimates by
the Finance Ministry forWorld Bank, Schneider et al, and
earlier estimates of NIPFP peg unaccounted income in
the range of 20-25% of GDP.
The diagram alongside will help clarify the different
estimations.
In this document, unaccounted income is represented by
the part that is unreported in GDP and amounts to 40%
of GDP.
Sectoral
Analysis
TradeMisinvoicing
IllicitFinancialFlows
MoneyLaundering
RealEstate
Education
Gold
Mining
Agriculture
8|
Trade Misinvoicing
1. Misdeclaration about the quantity of goods
2. Misuse of export promotion schemes: exploitation of incentives provided to
exporters, possibly through over-invoicing exports
3. Bogus or dummy Importer Exporter Codes (IEC)
4. Country of origin frauds: knowingly violate the rules of origin in order to take
advantage of bilateral trade agreements, lower tariffs, or to avoid country specific
restrictions or tariffs.
5. Undervaluation and overvaluation of imports/exports: the price and quantity of
goods are incorrectly reported and is the most common form commercial fraud.
Discrepancy in India’s FDI inward position:
Estimates of accumulation of unrecorded foreign
assets in India amount to US $89 billion (2011).
Example: India has underreported inward FDI flows
from Mauritius of US $108 billion[2]
Processes
$35.9
billion
The net financial flows for trade misinvoicing
for the year 2010 amounts to:
[2] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
9|
Trade Misinvoicing
When imports are over-invoiced, the amount of money paid out is far higher than the
actual value of goods imported into the country. Similarly, when exports are under-
invoiced, the amount of money received as export earnings is shown as far less than
the value of goods sent out.
On the other hand, importers would under invoice imports in order to escape
customs duty. Export over invoicing may occur when exporters try to take advantage
of export financing or other incentives given to exporters.
These practices happen simultaneously and the net amount dictates the flow.
Between 2000 and 2009, there was a net outflow of US $42.6 billion to Switzerland.
In the same period, there was a net inflow of $33 billion from Singapore into India
through trade misinvoicing.
The amount that has illicitly been moved
out of India between 2010 and 2013
through trade misinvoicing[3].
How does misinvoicing work?
$332 billion
[3] Source: The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, Dev Khar, Global Financial Integrity, 2010
10|
Example of Trade
Misinvoicing
AUS exporter ships 50 cars to
India. However, he sends the
invoice of $1 million to the Indian
company’s subsidiary in Mauritius
and gets paid for that amount.
The Indian importer sells the cars for $2
million, but shows the import bill of $1.5
million, thus evading tax of $500,000 and
parking it in an offshore account.
11|
Illicit Financial Flows
Illegal or illicit capital flows can be generated through a number of means that are not
revealed in national accounts or balance of payments figures: trade mispricing, bulk
cash movements, Hawala transactions and smuggling. Illicit financial flows involve
cross-border transfer of the proceeds of corruption, trade in contraband goods,
criminal activities, and tax evasion.
Estimate of total capital flight from India in
2010. As a percentage of GDP, illicit flows
from India range from 6.7% in 2007 to 0.9%
in 2009[4].
The net outflow from India has been $41
billion from 1970 to 2010[5].
Hawala Transactions
Hawala mechanism involves a network of agents and is used by migrants and other
players to transfer money from one location to another without the use of the formal
banking sector.
The individual who wants to transfer funds to another country uses an agent and
hands over the money to be transferred along with the recipient’s details. Another
agent in the recipient’s host country hands over the prescribed money and the two
agents settle the differences.
The rationale behind the use of such remittance systems are: 1) cost-effectiveness,
efficiency and reliability for people seeking to transfer legitimate or legal incomes and
2) lack of bureaucracy, lack of a proper trail and tax evasion or money laundering for
those who have difficulties revealing the sources of funds.
Since Hawala transactions are ‘invisible’ to legal authorities, it has been a vehicle for
the financing terrorist activities and money laundering.
$24.8 billion
[4] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
[5] The Price of Offshore Revisited, Henry, Tax Justice Network, 2012
12|
Illicit Financial Flows
Potential inflows through Hawala dealers:
1. Transfer by migrant workers to their families in India, mostly due to convenience, lower
transfer charges and better exchange rates.
2. Recovery of revenues transferred abroad through export under-invoicing. Exporters
would reduce their tax liability by EUI and bring back the locked revenue through
Hawala routes. However, FII and FDI are more attractive options.
3. Transfers by NRI to finance investments in India (real estate, etc).
Potential outflows through Hawala dealers:
1. Outflow for legitimate investment in India:Tax policies incentivising FDI and FII as
against domestic investment would encourage investors to seek to mask local
investment as FDI/FII.
2. Transfer for investment in the rest of the world: Investment through tax havens can
generate incomes with low tax liabilities from almost anywhere in the world. Further, if
income generated in India is unaccounted/illegal, better to move it out of the country to
avoid detection.
3. Transfers to finance import under-invoicing/export over-invoicing: Imports face customs
duties and local taxes on subsequent sales. However, by under-invoicing and meeting
the balance through Hawala, importers can escape high customs rates.
The total informal hawala market in India for
foreign exchange transactions in 2010.
Though the absolute number has been
increasing, the share of hawala in total
private transactions have reduced from
0.3% in 1991 to around 0.1% in 2010 [6].
Processes
[6] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
$6 billion
13|
Illicit Financial Flows
RoundTripping is the process of channeling local funds to special purpose entities
abroad and the subsequent return of funds to the local economy in the form of direct
investment.
In India, the rationale for round-tripping is the favourable treatment received by
investment from specific countries, for ex, Mauritius, Cyprus, Singapore and the
UAE, as a result of the specific provisions in DoubleTaxation AvoidanceAgreement
(‘DTAA’) with these countries.
The FDI statistics illustrate the preference for inflows from countries that are
recipients of special tax treatment from India. Nearly 28% of FDI inflows in to India
comes from Mauritius.
The present value of India’s total Illicit financial
flows.This is the stock of illegal capital flight from
India from 1948 to 2010. However, a significant
portion of this returns to India as part of round
tripping.
This is the product of corruption, bribery and
kickbacks, criminal activities, and tax evasion.
Illicit financial flows grew at 6.4% in real terms.
India lost $16 billion a year from 2002-2006 [7].
Round Tripping
[7] Source: The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, Dev Khar, Global Financial Integrity, 2010
$462 billion
14|
Money Laundering
From stashing unaccounted money in Swiss bank accounts to complicated Hawala
nets, money laundering has taken its own form in India.
Three part procedure to launder black money:
1. Placement:Criminals place illegal money in the financial system to launder it.The
likelihood of being caught is highest at this stage.
2. Layering: Hiding black money behind several layers of transactions, distancing the
money from the launderer. (eg: offshore accounts, shell companies, etc.)
3. Integration: Illegal money is integrated into the financial system and mixed with
other assets. Once this happens, distinguishing such money from legitimate money
becomes impossible.
4. Money may be laundered through: (i) establishing anonymous companies in tax
havens; (ii) trade mis-invoicing; (iii) purchasing artwork, jewellery, real estate, high
end automobiles, etc.
Money laundering through the underground
diamond trade runs into Rs. 400 billion.
Approximately Rs. 18.86 trillion of black money
was laundered out of India over the last decade.
Laundering money by banks takes place when they
ignore KYC norms, banking personnel are complicit
[8].
Processes
[8] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
Rs. 400 billion
15|
Real Estate
India’s real estate sector makes up about 5-6% of GDP (US$ 40-45 billion) and is
expected to touch $180 billion by 2020. Of this, the housing sector alone contributes
90-95%, while commercial segments and organised retail makes up the rest. From
2005 to 2012, the real estate sector received $10.2 billion from FDI.
Different Players in the market
Main Players: Developers, builders, contractors, and investors
Investors span traders/speculators, outright buyers, project financiers, real estate
funds/investment trusts/ private equity funds, property agents/brokers, and
underwriters.
The Central Economic Intelligence Bureau estimates
that up to 40% of the total unaccounted income in
India is parked in real estate.
The Sector
40% of total
black money
16|
Real Estate
Vulnerability of the real estate sector to the generation and absorption of unaccounted
income:
The “White Paper on Black Money” by the Finance Ministry (2012) notes that real
estate is a “common means of parking unaccounted money”.
Rapid urbanisation and migration; the limited availability of land; discretionary rules
for the allotment/sale of government land; the acquisition of private land by the
government; zoning regulation laid down different urban development authorities;
rules relating to stamp duties and registration charges and the difficulties in correctly
valuing the actual cost of construction have all contributed to the prevalence of
unaccounted income in real estate.
Further, the ease of concealing ownership through benamis, use of false identities,
corporations, or trusts, disguising ownership through complex structures spread across
several tax jurisdictions adds to the problem.
The percentage of real estate transactions that is
unaccounted in India.
The Central Board of DirectTaxes attribute this
mainly to the incomparability of immovable
properties and the ensuing variable valuations[9].
The Sector
[9] Source: CEIB, A Study on UnaccountedIncome in India, National Institute of Public Finance and Policy (NIPFP), 2012
40% of real
estate
17|
Real Estate
1. Percentage completion method for accounting annual profits: Builders do not bring into
P/L account any amount of the project till 20 to 40 per cent of the project cost is completed.
2. Absence of project-wise accounts: Most builders prepare and submit a composite
financial statement of projects spanning different locations and regulations, making it
easier to conceal inflation of costs and suppression of receipts.
3. Suppression/Understatement of receipts: Due to high tax rates – stamp duty of 5-14%
and long term capital gains of 20% - both buyers and sellers tend to under-report the
transaction value and settle the differential via cash. Understatement up to 40-50% is
common.They also generate various receipts from ancillary sources, which aren’t recorded.
4. Inflation of expenses: It is a common practice to inflate expenses through fictitious bills
and overstate rates/quantities.Wage is an important expense in real estate projects and
can easily be overstated by manipulating wage/attendance registers and paying via cash.
5. Inflation of profits from projects exempt from IT
6. Linkages with other taxes: The large amount of unaccounted money in real estate is
attributed to high transaction tax, in the form of stamp duty, which ranges from 3-14%.
The existence of multiple levies of service tax also contributes to unaccounted income.
Finally, sales tax and work contracts incentivise developers and builders to go the
unaccounted route.
Estimate of unaccounted money
generated in real estate transactions in
India in the year 2010-11[10].
Issues in Taxation in Real Estate
[10] Source: A Study on Unaccounted Income in India, NationalInstitute of Public Finance and Policy (NIPFP), 2012
Rs. 4 trillion
18|
Real Estate
Corruption in Land Acquisition
Corruption in real estate begins with land acquisition – via allotment or auction. Politicians and
builders have inside information about upcoming critical infrastructure projects, which can
increase land rates. Politicians also leverage their power to help builders acquire land for a
commission.The vagueness of ‘public purposes’ leaves public land vulnerable for allotment to
private individuals.
Land Notification and Denotification
Under this, a politician involved in the decision to notify land for acquisition can acquire land
through relatives and claim huge amounts in compensation. Politicians also denotify lands
identified for acquisition in exchange for bribes from builders and developers. Several former
Chief Ministers of Karnataka have land notification and denotification cases filed against them.
One such instance in Bangalore cost the Karnataka state exchequer around Rs.5 billion.
Corruption in Approvals: Builders are keen to build up to the maximum amount possible,
whereas, building byelaw places limits on Floor Space Index (FSI).The mechanism for fixing FSI
in different parts of the city is opaque. After FSI, the builder requires several approvals from
different regulatory bodies, and at each stage, there is ample scope for corruption.
In Maharashtra, for example, a builder needs about 60 approvals from the government to
construct a property, which typically takes between one and four years. In order to ensure
approvals, builders have to resort to paying bribes, which add about 30% to the project cost.
Unaccounted value as a percentage of total value of
transaction in New Delhi in the year 2010 amounts
to 78%. In Bangalore and Kolkata, the number is
around 50%[11].
Corruption in Real Estate
[11] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
78% in New
Delhi
19|
Education
Regulated and Unregulated: The regulated sector in education consists of school
education and higher education, which is further categorised into technical, non-
technical and medical education.The unregulated sector consists of pre-school,
coaching and vocational training institutes.
Biggest sources of black money in this sector are bribe payments made by these
institutions to get approvals, extremely high capitation fees in higher education
(around Rs.5 million for a seat in medical college and Rs. 1.5 million in engineering),
high donations for school admissions, gold plating of expenses incurred, branding
and sale of franchise, etc.
Educational institutions are often not held to the same standards of accountability
as other firms.The DirectorateGeneral of IncomeTax does not have a regular system
for exchanging information with other institutions that are authorised to register
charitable institutions.
Educational institutions are often exempt from filing annual returns in digital forms.
The amount of unaccounted income
generated in the education sector in a
year.
The estimated total capitation fee
for 2011 was Rs.59.53 billion in
Indian higher education[12].
The Education Sector
[12] Source: Investigative research report on black money generation in Education, Centre for Research and Prevention ofComputer Crimes, June 2014.
Rs. 484 billion
20|
Gold
The demand for gold in India is quite inelastic as evidenced by the 25% growth in
demand for gold despite a 400% rise in import duties.
The jewellery demand in India was estimated at 0.4 grams per annum per capita.This
represents 75% of the total demand for gold in India.
Gold plays a major role in the generation and absorption of black money in the
country.When import duties increase, smuggling of gold increases proportionately. IT
officials raiding and finding crores worth of gold is quite a common story.This shows
that gold is a popular instrument for storing unaccounted income.
There’s also significant round tripping of gold. Some agents have nominated agency
status, which allows them to import gold free of duty on certain conditions. In order to
meet this criteria, these agents import gold, convert them into coins and jewellery,
export it, get it recycled into gold bars and import it again to India.
Gold is also a popular instrument in the Hawala market for settling differences
between agents.
According to a report by Macquarie titled “India’s
fatal attraction”, Indians hoard about $950 billion or
18,000 tonnes of gold.
Around 8% of India’s total household savings are
held in gold
India is the world’s largest consumer of gold,
accounting for 11% of global gold stock [13].
Demand for gold and Malpractices
[13] Source: Gold: dulling India’s economy, Neil Munshi, Financial Times, 05 December, 2011
$950 billion,
18,000 tonnes
21|
Mining
- Understatement of production
- Inflation of expenses
- Understatement of Sale Price/export proceeds
- Collusive Arrangements
- Illegal Mining
- Diversion of illegally mined ore for domestic production
- Under-invoicing of exports
- Large ScaleCorruption
Income tax officials unearthed underinvoicing and tax evasion of around Rs. 860 million by
a company in Bellary, Karnataka.Typically, mining companies get permission from the
environmental ministry to mine up to a particular quantity. However, it is common practice
to over-extract the natural resource and under report it.
According to an investigative report byThe Hindu, the loss to Karnataka’s exchequer
due to illegal mining was Rs.1 trillion between 2006 and 2010[15].The Lokayukta report
in 2011 claims that nearly 30 million metric tonnes of iron-ore was illicitly exported
during this period, which amounts to Rs. 122.28 billion[16].
Estimates suggest that loss to the exchequer due to
illegal mining in India is around Rs. 160 billion over 4
sample years.
Estimates of overall leakages in the mining sector
amounts to 10.2% of GDP contribution from this
sector[14].
Processes
[14] Source: A Study on Unaccounted Income in India, NationalInstitute of Public Finance and Policy (NIPFP), 2012
[15] Karnataka lost Rs. 1 lakh crore from 2006-2010, Sudipto Mondal, The Hindu, 17 June 2013.
[16] Report on the reference made by the Government of Karnataka under section 7(2-a) of the Karnataka Lokayukta Act, 1984, 27 July, 2011
Rs. 40 billion
22|
Agriculture
Most of the agricultural income in India is not subject to tax.While agriculture accounts for
about 12.3% of GDP in 2009-10, its contribution to taxation is limited toVAT paid on some
of the products and income tax paid on few of the plantation crops such as tea.
Since an entire stream of income is exempt, it invites avenues to launder black money,
where tainted income gets treated as agricultural income.This is witnessed by agricultural
incomes growing exponentially, when there is no visible growth in productivity in
agriculture.
A growing trend is that of corporates reporting agricultural income.Total agricultural
income reported by corporates amount to Rs. 313.13 billion in 2009-10. Not all these
companies specialise in agricultural products.Taxes foregone due to this amount up to Rs.
114.18 billion in 2009-10[18].
A large part of the problem arises from the loosely defined term of “agricultural income”,
which is currently broad enough to invite people claiming tax exemptions for a wide array of
activities. Multinationals involved in growing hybrid seeds also claim that their profits are a
part of agricultural income and thus should be tax exempt.
According to an estimate by NIPFP, Rs.500 billion is
the revenue foregone by not taxing agricultural
income in 2007-08.This amounts to 1.2% of GDP. It
would also add about 19% to the revenue of the
states[17].
In 2011, according to an RTI, the agricultural
income declared was Rs. 2,000 trillion by 657,000
assessees, giving an average income of Rs. 304
million[19].
The problem with agricultural
income
[17, 18] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
[19] Farms grow massive income for select few, D K Pandey and S Raghavan, The Hindu, 19 March 2016
Rs. 500 billion
Corruption and
Unaccounted
Income
GovernmentContracts
DefenceProcurement
ElectionFunding
PublicInfrastructure
GovernmentSchemes
24|
Government Contracts
The CentralVigilanceCommission (CVC) received 7,227 complaints (including 1,696 cases
from the previous year) of corruption (including kickbacks) against government employees
in 2012. In 2011, the CVC received as many as 8,805 complaints against railway employees,
followed by 8,430 against bank employees and 5,026 against income tax officers.
Kickbacks follow every government department that carries out transactions with private
parties.The amount of money siphoned off depends on the size of the original transaction.
There are kickbacks in natural resources, energy, telecom, defense, public works, irrigation,
roads, and any other sector that calls for a tender/government contract.The process is
strikingly similar across departments.There are rules which mandate all government
contracts to be made through tenders, but the tender process is more often than not rigged.
The minister introduces his chosen contractor to the superintending engineer.The terms and
conditions of the tender are fixed in consultation with this contractor to his/her favour.This
contractor then submits three tenders - two of them from bogus companies - to make it
appear like a competitive, transparent process and finally walks away with the contract.
In the process, the contractor pays 6% of contract cost to the minister as down-payment;
another 6% to relevant officials after winning the contract, 3% for project clearance,
pollution control and subsidy clearance. An additional 6% goes to the minister each time
the project cost increases.
Real estate and gold are also preferred forms of paying kickbacks.
The estimated percentage of kickbacks on
most government contracts, as admitted by
government officials.
Of the 1048 cases registered with the CBI in
2012, over 75% involved kickbacks received
by government officials[20].
Processes
[20] Source: Kickback Nation, Veena Sandhu and TE Narasimhan, Business Standard, 8 June 2013
10% - 20%
25|
Defence Procurement
According toTransparency International, there has been massive expansion in India’s
military capabilities, and consequently there has been a similar increase in kickbacks for
defence procurement and corruption in other related activities.
Apart from the AgustaWestland scandal, there have been several big ticket scams in
defence procurement recently. Investigation into the Barak Missile procurement revealed
that about 3.5% of procurement cost was paid as bribe to concerned government officials.
Sudipta Ghosh, Kargil coffins,Tatra trucks and Assam Riflex cases are some of the high
profile scandals plaguing the Indian defence sector.
Transparency International also reports that, in 2013, the Indian Army was found to be
running golf courses illegally on government land. Air Force officials have used defence
land for unauthorised use like building shopping malls and cinema halls. India’s defence
institutions have also been involved in the exploitation of natural resources.
There are kickbacks at all levels in the Military Engineering Services responsible for
providing accessory services like military roads, water and electricity supply, drainage,
furniture etc.
Though the CAG and PAC have provided active oversight on defence procurement, the
absence of a coherent defence policy weakens the quality of oversight. Further, there was
no legislative oversight of India’s intelligence agencies.
The alleged bribe given to government and
air force officials by AgustaWestland for
securing the Rs.36 billion deal[21].
Transparency International rated India in
the ‘D’ or ‘high’ risk bracket for corruption
in government defence [22].
Processes
[21] Source: CBI seeks Italian Court’s order on AgustaWestland Graft, NDTV, 27 April 2016
[22] Government Defence Anti-Corruption Index, Regional results: Asia, Transparency International, 2015
Rs. 3.60 billion
26|
Election Funding
1. High percentages of voters are paid in cash and drugs to lure their votes.
2. Accepting cash donations of amounts over Rs. 20,000; keeping names and details
of the donors private, etc. causes a lot of opacity in the election funding system.
3. Election candidates and political parties do not honestly declare their estimated
and actual election spending.The ElectionCommission has found significant
discrepancies in the expenditure declared and the expenditure estimated to have
actually been incurred.
4. The IncomeTax Act does not have sufficient conditions or political parties to fulfill,
in order to avail tax exemption.
5. Lack of communication between IncomeTax Department and the Election
Commission is a disadvantage.The present system does not allow for the Election
Commission to share each party’s election candidate’s election affidavit and
expenditure sheet with the income tax department. Enabling this would assist the
income tax department which can then be allowed to scrutinize cases as
appropriate.
Estimated proportion of election funding that comes
from unaccounted sources is 75%.
A 2001 committee report found that a candidate’s
campaign expenditure was 20 times more than the
permissible limit.
Statistically, candidates with declared assets of over Rs.
50 million are more likely to emerge victorious than
others[23].
Processes
[23] Source: A Study on Unaccounted Income in India, NationalInstitute of Public Finance and Policy (NIPFP), 2012
75% of election
funding
27|
Irrigation, Roads, PWD,
National Highways
1. Due to an opaque tendering process, sub-par contractors engaged.Therefore, quality is
compromised and funds misappropriated.
2. Kickbacks at all levels – from engineers, to contractors, to politicians. Approximately
22% of the tender costs in irrigation are political kickbacks – paid to everyone from the
clerk to the minister in charge. Numerous such scattered incidents of corruption are
found across India.These instances are symptoms of a larger problem – that of laxity in
governance[26].
3. Collusive relations between concessionaries and implementation agencies;
4. Institutional failure and laxity. Compromised quality of irrigation systems because of
political and contractors’ kickbacks
5. Contractors procuring construction contracts collusively show poor performance.
Malpractices and Reasons
The estimated sudden suspicious increase in
the cost of irrigation projects in
Maharashtra[24]
The biggest Public Works Department (“PWD”)
scam unearthed in Karnataka[25].
Big contractors have hijacked the entire process, and the lack of transparency in publicly available data
makes it more difficult to gauge the extent of corruption.
[24] Source: Irrigation Scam, a Drain on Maharashtra’s Exchequer , The Hindu, 26 September 2012
[25] Source: Magadi Sub-division Scam: PWD Secretary named in charge sheet, The Hindu, 29 July 2014
[26] Source: Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
433%
Rs. 563 million
28|
Irrigation, Roads, PWD,
National Highways
1. Complicated regulatory structures and approval processes lend the sector prone to
bribery and corruption.
2. Poorly implemented and monitored administrative tasks (eg: detailed project reports)
leads to lesser accountability.
3. Lax redressal mechanism for aggrieved farmers, consumers.
4. No standardization of unit costs of construction.
5. Due to non mobilization and non replacement of key personnel, quality of supervision is
also compromised.
Additional Challenges
[27] ‘Hand over road repairs scam probe to CBI, dissolve BMC’, The Times of India (Mumbai Edition), 29 July 2016
The estimate of corruption in road
repairs in Mumbai over the last 3
years[27].
Rs. 90 billion
29|
Government Schemes
1. Large bribes paid by beneficiaries to avail essential PDS services;
2. Payment system is unregulated. Beneficiaries are required to pay much higher than
mandated;
3. Wastage of essential PDS goods due to lack of supervision over trucks;
unavailability of goods due to callous supervision / vigilance;
4. Reselling of goods procured through the PDS system in the open market;
5. NREGS workers are paid by contractors and middle men, who make the most of
this opacity and appropriate funds to themselves and other government officials;
6. Corruption and funds derailed at every bureaucratic rung of the NREG system; and
7. Inadequate worksite facilities to the NREGS workers, assets of bad quality
contribute to overall failure of the system.
Rampant corruption at every rung of
bureaucracy contributes to the
prevalence of black money[28].
The total unaccounted money in the Public
Distribution System (“PDS”)
Processes
Or, 24% of the total amount of funds
misappropriated from the National Rural
Employment Guarantee Scheme (“NREGS”).
[28] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
Rs. 141.55 billion
Rs. 91.69 billion

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Tdd unaccounted-income-am-mv-2016-05 29 nov

  • 1. ANACCOUNT OF UNACCOUNTED MONEY IN INDIA This presentation deals with concepts related to unaccounted income, followed by sector specific analysis and finally, generation and utilisation of unaccounted income due to graft. Takshashila Discussion Document November 21, 2016 Prepared by: Anupam Manur ManasaVenkataraman TheTakshashila Institution
  • 2. 2| Unaccounted economy in India Unaccounted economy includes a combination of illegal economy, unreported economy, unrecorded economy and the informal economy. Illegal economy comprises of income generated by economic activities that are in violation of legal statutes defining the scope of legitimate forms of commerce. Unreported economy comprises of economic activities that circumvent or evade fiscal rules as set out in the tax code. Unrecorded economy comprises of economic activities circumventing the institutional requirement of reporting to government statistical agencies. Informal economy is not taxed and hence not accurately monitored by government agencies. Unaccounted economy comprises of transactions and incomes on which due taxes have not been paid and is not reflected in any other statistics on economic activity within the country.Thus, it is equivalent to income that is unreported in GDP.
  • 3. 3| Unaccounted Economy in India Thus, apart from income earned through illegal means, the term unaccounted income includes legal income concealed from public authorities to: — evade payment of taxes — evade payment of other statutory contributions — to evade compliance with the provisions of industrial or other laws Illegal,Unrecorded, Unreported andInformal Economy
  • 4. 4| Stock vs. Flow Stock Vs. Flow (Unaccounted wealth vs. income) Incomes are flows generated during any given time period, while wealth relates to the stock at a particular point in time. Unaccounted wealth can be defined in two ways. First, the amount of wealth not reported for the appropriate tax liable and second, the accumulation of unaccounted income over a period of time. Unaccounted wealth is tough to measure or estimate due to a lack reliable measures of accounted wealth to begin with. DomesticVs. Foreign Unaccounted incomes Unaccounted wealth exists both within and outside the country, in jurisdictions which are ‘non-transparent’ and in forms which do not reveal the actual owner of the resource. UtilizationVs. Generation of Unaccounted Income The generation of unaccounted income relates to the suppression of scale of economic activity through an increase in corresponding expenses or through a reduction of reported sales. Utilization of unaccounted income refers to the expenditure incurred out of unaccounted incomes, such as expenditures on purchase of assets like gold, precious stones, real estate, and other commodities. Incomes are flows generated during any given time period, while wealth relates to the stock at a particular point in time.
  • 5. 5| Share of Unaccounted income in India’s GDP 69.6 66.2 49.4 45.2 41.7 0 10 20 30 40 50 60 70 80 Share in total GDP 1980-81 1990-91 2000-01 2004-05 2009-10 Estimates of unaccounted income in India varies greatly with different estimation methods and there is no consensus on the estimate.The range is from 25% of GDP to 75% of GDP for 2009-10.The numbers used here are from a study from NIPFP[1], which uses “State Space based estimate”. Therehasbeenasteadydeclineintherate of generationofunaccounted moneyinIndia. [1] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
  • 6. 6| Size of Unaccounted Income Multiple Estimation Methods, Multiple Estimates The size of unaccounted income in India depends upon the definition of unaccounted income and within that, the method chosen to estimate it. Measures that look only at income that is unrecorded for tax tends to be much smaller. For example, estimates by the Finance Ministry forWorld Bank, Schneider et al, and earlier estimates of NIPFP peg unaccounted income in the range of 20-25% of GDP. The diagram alongside will help clarify the different estimations. In this document, unaccounted income is represented by the part that is unreported in GDP and amounts to 40% of GDP.
  • 8. 8| Trade Misinvoicing 1. Misdeclaration about the quantity of goods 2. Misuse of export promotion schemes: exploitation of incentives provided to exporters, possibly through over-invoicing exports 3. Bogus or dummy Importer Exporter Codes (IEC) 4. Country of origin frauds: knowingly violate the rules of origin in order to take advantage of bilateral trade agreements, lower tariffs, or to avoid country specific restrictions or tariffs. 5. Undervaluation and overvaluation of imports/exports: the price and quantity of goods are incorrectly reported and is the most common form commercial fraud. Discrepancy in India’s FDI inward position: Estimates of accumulation of unrecorded foreign assets in India amount to US $89 billion (2011). Example: India has underreported inward FDI flows from Mauritius of US $108 billion[2] Processes $35.9 billion The net financial flows for trade misinvoicing for the year 2010 amounts to: [2] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012
  • 9. 9| Trade Misinvoicing When imports are over-invoiced, the amount of money paid out is far higher than the actual value of goods imported into the country. Similarly, when exports are under- invoiced, the amount of money received as export earnings is shown as far less than the value of goods sent out. On the other hand, importers would under invoice imports in order to escape customs duty. Export over invoicing may occur when exporters try to take advantage of export financing or other incentives given to exporters. These practices happen simultaneously and the net amount dictates the flow. Between 2000 and 2009, there was a net outflow of US $42.6 billion to Switzerland. In the same period, there was a net inflow of $33 billion from Singapore into India through trade misinvoicing. The amount that has illicitly been moved out of India between 2010 and 2013 through trade misinvoicing[3]. How does misinvoicing work? $332 billion [3] Source: The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, Dev Khar, Global Financial Integrity, 2010
  • 10. 10| Example of Trade Misinvoicing AUS exporter ships 50 cars to India. However, he sends the invoice of $1 million to the Indian company’s subsidiary in Mauritius and gets paid for that amount. The Indian importer sells the cars for $2 million, but shows the import bill of $1.5 million, thus evading tax of $500,000 and parking it in an offshore account.
  • 11. 11| Illicit Financial Flows Illegal or illicit capital flows can be generated through a number of means that are not revealed in national accounts or balance of payments figures: trade mispricing, bulk cash movements, Hawala transactions and smuggling. Illicit financial flows involve cross-border transfer of the proceeds of corruption, trade in contraband goods, criminal activities, and tax evasion. Estimate of total capital flight from India in 2010. As a percentage of GDP, illicit flows from India range from 6.7% in 2007 to 0.9% in 2009[4]. The net outflow from India has been $41 billion from 1970 to 2010[5]. Hawala Transactions Hawala mechanism involves a network of agents and is used by migrants and other players to transfer money from one location to another without the use of the formal banking sector. The individual who wants to transfer funds to another country uses an agent and hands over the money to be transferred along with the recipient’s details. Another agent in the recipient’s host country hands over the prescribed money and the two agents settle the differences. The rationale behind the use of such remittance systems are: 1) cost-effectiveness, efficiency and reliability for people seeking to transfer legitimate or legal incomes and 2) lack of bureaucracy, lack of a proper trail and tax evasion or money laundering for those who have difficulties revealing the sources of funds. Since Hawala transactions are ‘invisible’ to legal authorities, it has been a vehicle for the financing terrorist activities and money laundering. $24.8 billion [4] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012 [5] The Price of Offshore Revisited, Henry, Tax Justice Network, 2012
  • 12. 12| Illicit Financial Flows Potential inflows through Hawala dealers: 1. Transfer by migrant workers to their families in India, mostly due to convenience, lower transfer charges and better exchange rates. 2. Recovery of revenues transferred abroad through export under-invoicing. Exporters would reduce their tax liability by EUI and bring back the locked revenue through Hawala routes. However, FII and FDI are more attractive options. 3. Transfers by NRI to finance investments in India (real estate, etc). Potential outflows through Hawala dealers: 1. Outflow for legitimate investment in India:Tax policies incentivising FDI and FII as against domestic investment would encourage investors to seek to mask local investment as FDI/FII. 2. Transfer for investment in the rest of the world: Investment through tax havens can generate incomes with low tax liabilities from almost anywhere in the world. Further, if income generated in India is unaccounted/illegal, better to move it out of the country to avoid detection. 3. Transfers to finance import under-invoicing/export over-invoicing: Imports face customs duties and local taxes on subsequent sales. However, by under-invoicing and meeting the balance through Hawala, importers can escape high customs rates. The total informal hawala market in India for foreign exchange transactions in 2010. Though the absolute number has been increasing, the share of hawala in total private transactions have reduced from 0.3% in 1991 to around 0.1% in 2010 [6]. Processes [6] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012 $6 billion
  • 13. 13| Illicit Financial Flows RoundTripping is the process of channeling local funds to special purpose entities abroad and the subsequent return of funds to the local economy in the form of direct investment. In India, the rationale for round-tripping is the favourable treatment received by investment from specific countries, for ex, Mauritius, Cyprus, Singapore and the UAE, as a result of the specific provisions in DoubleTaxation AvoidanceAgreement (‘DTAA’) with these countries. The FDI statistics illustrate the preference for inflows from countries that are recipients of special tax treatment from India. Nearly 28% of FDI inflows in to India comes from Mauritius. The present value of India’s total Illicit financial flows.This is the stock of illegal capital flight from India from 1948 to 2010. However, a significant portion of this returns to India as part of round tripping. This is the product of corruption, bribery and kickbacks, criminal activities, and tax evasion. Illicit financial flows grew at 6.4% in real terms. India lost $16 billion a year from 2002-2006 [7]. Round Tripping [7] Source: The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, Dev Khar, Global Financial Integrity, 2010 $462 billion
  • 14. 14| Money Laundering From stashing unaccounted money in Swiss bank accounts to complicated Hawala nets, money laundering has taken its own form in India. Three part procedure to launder black money: 1. Placement:Criminals place illegal money in the financial system to launder it.The likelihood of being caught is highest at this stage. 2. Layering: Hiding black money behind several layers of transactions, distancing the money from the launderer. (eg: offshore accounts, shell companies, etc.) 3. Integration: Illegal money is integrated into the financial system and mixed with other assets. Once this happens, distinguishing such money from legitimate money becomes impossible. 4. Money may be laundered through: (i) establishing anonymous companies in tax havens; (ii) trade mis-invoicing; (iii) purchasing artwork, jewellery, real estate, high end automobiles, etc. Money laundering through the underground diamond trade runs into Rs. 400 billion. Approximately Rs. 18.86 trillion of black money was laundered out of India over the last decade. Laundering money by banks takes place when they ignore KYC norms, banking personnel are complicit [8]. Processes [8] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012 Rs. 400 billion
  • 15. 15| Real Estate India’s real estate sector makes up about 5-6% of GDP (US$ 40-45 billion) and is expected to touch $180 billion by 2020. Of this, the housing sector alone contributes 90-95%, while commercial segments and organised retail makes up the rest. From 2005 to 2012, the real estate sector received $10.2 billion from FDI. Different Players in the market Main Players: Developers, builders, contractors, and investors Investors span traders/speculators, outright buyers, project financiers, real estate funds/investment trusts/ private equity funds, property agents/brokers, and underwriters. The Central Economic Intelligence Bureau estimates that up to 40% of the total unaccounted income in India is parked in real estate. The Sector 40% of total black money
  • 16. 16| Real Estate Vulnerability of the real estate sector to the generation and absorption of unaccounted income: The “White Paper on Black Money” by the Finance Ministry (2012) notes that real estate is a “common means of parking unaccounted money”. Rapid urbanisation and migration; the limited availability of land; discretionary rules for the allotment/sale of government land; the acquisition of private land by the government; zoning regulation laid down different urban development authorities; rules relating to stamp duties and registration charges and the difficulties in correctly valuing the actual cost of construction have all contributed to the prevalence of unaccounted income in real estate. Further, the ease of concealing ownership through benamis, use of false identities, corporations, or trusts, disguising ownership through complex structures spread across several tax jurisdictions adds to the problem. The percentage of real estate transactions that is unaccounted in India. The Central Board of DirectTaxes attribute this mainly to the incomparability of immovable properties and the ensuing variable valuations[9]. The Sector [9] Source: CEIB, A Study on UnaccountedIncome in India, National Institute of Public Finance and Policy (NIPFP), 2012 40% of real estate
  • 17. 17| Real Estate 1. Percentage completion method for accounting annual profits: Builders do not bring into P/L account any amount of the project till 20 to 40 per cent of the project cost is completed. 2. Absence of project-wise accounts: Most builders prepare and submit a composite financial statement of projects spanning different locations and regulations, making it easier to conceal inflation of costs and suppression of receipts. 3. Suppression/Understatement of receipts: Due to high tax rates – stamp duty of 5-14% and long term capital gains of 20% - both buyers and sellers tend to under-report the transaction value and settle the differential via cash. Understatement up to 40-50% is common.They also generate various receipts from ancillary sources, which aren’t recorded. 4. Inflation of expenses: It is a common practice to inflate expenses through fictitious bills and overstate rates/quantities.Wage is an important expense in real estate projects and can easily be overstated by manipulating wage/attendance registers and paying via cash. 5. Inflation of profits from projects exempt from IT 6. Linkages with other taxes: The large amount of unaccounted money in real estate is attributed to high transaction tax, in the form of stamp duty, which ranges from 3-14%. The existence of multiple levies of service tax also contributes to unaccounted income. Finally, sales tax and work contracts incentivise developers and builders to go the unaccounted route. Estimate of unaccounted money generated in real estate transactions in India in the year 2010-11[10]. Issues in Taxation in Real Estate [10] Source: A Study on Unaccounted Income in India, NationalInstitute of Public Finance and Policy (NIPFP), 2012 Rs. 4 trillion
  • 18. 18| Real Estate Corruption in Land Acquisition Corruption in real estate begins with land acquisition – via allotment or auction. Politicians and builders have inside information about upcoming critical infrastructure projects, which can increase land rates. Politicians also leverage their power to help builders acquire land for a commission.The vagueness of ‘public purposes’ leaves public land vulnerable for allotment to private individuals. Land Notification and Denotification Under this, a politician involved in the decision to notify land for acquisition can acquire land through relatives and claim huge amounts in compensation. Politicians also denotify lands identified for acquisition in exchange for bribes from builders and developers. Several former Chief Ministers of Karnataka have land notification and denotification cases filed against them. One such instance in Bangalore cost the Karnataka state exchequer around Rs.5 billion. Corruption in Approvals: Builders are keen to build up to the maximum amount possible, whereas, building byelaw places limits on Floor Space Index (FSI).The mechanism for fixing FSI in different parts of the city is opaque. After FSI, the builder requires several approvals from different regulatory bodies, and at each stage, there is ample scope for corruption. In Maharashtra, for example, a builder needs about 60 approvals from the government to construct a property, which typically takes between one and four years. In order to ensure approvals, builders have to resort to paying bribes, which add about 30% to the project cost. Unaccounted value as a percentage of total value of transaction in New Delhi in the year 2010 amounts to 78%. In Bangalore and Kolkata, the number is around 50%[11]. Corruption in Real Estate [11] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012 78% in New Delhi
  • 19. 19| Education Regulated and Unregulated: The regulated sector in education consists of school education and higher education, which is further categorised into technical, non- technical and medical education.The unregulated sector consists of pre-school, coaching and vocational training institutes. Biggest sources of black money in this sector are bribe payments made by these institutions to get approvals, extremely high capitation fees in higher education (around Rs.5 million for a seat in medical college and Rs. 1.5 million in engineering), high donations for school admissions, gold plating of expenses incurred, branding and sale of franchise, etc. Educational institutions are often not held to the same standards of accountability as other firms.The DirectorateGeneral of IncomeTax does not have a regular system for exchanging information with other institutions that are authorised to register charitable institutions. Educational institutions are often exempt from filing annual returns in digital forms. The amount of unaccounted income generated in the education sector in a year. The estimated total capitation fee for 2011 was Rs.59.53 billion in Indian higher education[12]. The Education Sector [12] Source: Investigative research report on black money generation in Education, Centre for Research and Prevention ofComputer Crimes, June 2014. Rs. 484 billion
  • 20. 20| Gold The demand for gold in India is quite inelastic as evidenced by the 25% growth in demand for gold despite a 400% rise in import duties. The jewellery demand in India was estimated at 0.4 grams per annum per capita.This represents 75% of the total demand for gold in India. Gold plays a major role in the generation and absorption of black money in the country.When import duties increase, smuggling of gold increases proportionately. IT officials raiding and finding crores worth of gold is quite a common story.This shows that gold is a popular instrument for storing unaccounted income. There’s also significant round tripping of gold. Some agents have nominated agency status, which allows them to import gold free of duty on certain conditions. In order to meet this criteria, these agents import gold, convert them into coins and jewellery, export it, get it recycled into gold bars and import it again to India. Gold is also a popular instrument in the Hawala market for settling differences between agents. According to a report by Macquarie titled “India’s fatal attraction”, Indians hoard about $950 billion or 18,000 tonnes of gold. Around 8% of India’s total household savings are held in gold India is the world’s largest consumer of gold, accounting for 11% of global gold stock [13]. Demand for gold and Malpractices [13] Source: Gold: dulling India’s economy, Neil Munshi, Financial Times, 05 December, 2011 $950 billion, 18,000 tonnes
  • 21. 21| Mining - Understatement of production - Inflation of expenses - Understatement of Sale Price/export proceeds - Collusive Arrangements - Illegal Mining - Diversion of illegally mined ore for domestic production - Under-invoicing of exports - Large ScaleCorruption Income tax officials unearthed underinvoicing and tax evasion of around Rs. 860 million by a company in Bellary, Karnataka.Typically, mining companies get permission from the environmental ministry to mine up to a particular quantity. However, it is common practice to over-extract the natural resource and under report it. According to an investigative report byThe Hindu, the loss to Karnataka’s exchequer due to illegal mining was Rs.1 trillion between 2006 and 2010[15].The Lokayukta report in 2011 claims that nearly 30 million metric tonnes of iron-ore was illicitly exported during this period, which amounts to Rs. 122.28 billion[16]. Estimates suggest that loss to the exchequer due to illegal mining in India is around Rs. 160 billion over 4 sample years. Estimates of overall leakages in the mining sector amounts to 10.2% of GDP contribution from this sector[14]. Processes [14] Source: A Study on Unaccounted Income in India, NationalInstitute of Public Finance and Policy (NIPFP), 2012 [15] Karnataka lost Rs. 1 lakh crore from 2006-2010, Sudipto Mondal, The Hindu, 17 June 2013. [16] Report on the reference made by the Government of Karnataka under section 7(2-a) of the Karnataka Lokayukta Act, 1984, 27 July, 2011 Rs. 40 billion
  • 22. 22| Agriculture Most of the agricultural income in India is not subject to tax.While agriculture accounts for about 12.3% of GDP in 2009-10, its contribution to taxation is limited toVAT paid on some of the products and income tax paid on few of the plantation crops such as tea. Since an entire stream of income is exempt, it invites avenues to launder black money, where tainted income gets treated as agricultural income.This is witnessed by agricultural incomes growing exponentially, when there is no visible growth in productivity in agriculture. A growing trend is that of corporates reporting agricultural income.Total agricultural income reported by corporates amount to Rs. 313.13 billion in 2009-10. Not all these companies specialise in agricultural products.Taxes foregone due to this amount up to Rs. 114.18 billion in 2009-10[18]. A large part of the problem arises from the loosely defined term of “agricultural income”, which is currently broad enough to invite people claiming tax exemptions for a wide array of activities. Multinationals involved in growing hybrid seeds also claim that their profits are a part of agricultural income and thus should be tax exempt. According to an estimate by NIPFP, Rs.500 billion is the revenue foregone by not taxing agricultural income in 2007-08.This amounts to 1.2% of GDP. It would also add about 19% to the revenue of the states[17]. In 2011, according to an RTI, the agricultural income declared was Rs. 2,000 trillion by 657,000 assessees, giving an average income of Rs. 304 million[19]. The problem with agricultural income [17, 18] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012 [19] Farms grow massive income for select few, D K Pandey and S Raghavan, The Hindu, 19 March 2016 Rs. 500 billion
  • 24. 24| Government Contracts The CentralVigilanceCommission (CVC) received 7,227 complaints (including 1,696 cases from the previous year) of corruption (including kickbacks) against government employees in 2012. In 2011, the CVC received as many as 8,805 complaints against railway employees, followed by 8,430 against bank employees and 5,026 against income tax officers. Kickbacks follow every government department that carries out transactions with private parties.The amount of money siphoned off depends on the size of the original transaction. There are kickbacks in natural resources, energy, telecom, defense, public works, irrigation, roads, and any other sector that calls for a tender/government contract.The process is strikingly similar across departments.There are rules which mandate all government contracts to be made through tenders, but the tender process is more often than not rigged. The minister introduces his chosen contractor to the superintending engineer.The terms and conditions of the tender are fixed in consultation with this contractor to his/her favour.This contractor then submits three tenders - two of them from bogus companies - to make it appear like a competitive, transparent process and finally walks away with the contract. In the process, the contractor pays 6% of contract cost to the minister as down-payment; another 6% to relevant officials after winning the contract, 3% for project clearance, pollution control and subsidy clearance. An additional 6% goes to the minister each time the project cost increases. Real estate and gold are also preferred forms of paying kickbacks. The estimated percentage of kickbacks on most government contracts, as admitted by government officials. Of the 1048 cases registered with the CBI in 2012, over 75% involved kickbacks received by government officials[20]. Processes [20] Source: Kickback Nation, Veena Sandhu and TE Narasimhan, Business Standard, 8 June 2013 10% - 20%
  • 25. 25| Defence Procurement According toTransparency International, there has been massive expansion in India’s military capabilities, and consequently there has been a similar increase in kickbacks for defence procurement and corruption in other related activities. Apart from the AgustaWestland scandal, there have been several big ticket scams in defence procurement recently. Investigation into the Barak Missile procurement revealed that about 3.5% of procurement cost was paid as bribe to concerned government officials. Sudipta Ghosh, Kargil coffins,Tatra trucks and Assam Riflex cases are some of the high profile scandals plaguing the Indian defence sector. Transparency International also reports that, in 2013, the Indian Army was found to be running golf courses illegally on government land. Air Force officials have used defence land for unauthorised use like building shopping malls and cinema halls. India’s defence institutions have also been involved in the exploitation of natural resources. There are kickbacks at all levels in the Military Engineering Services responsible for providing accessory services like military roads, water and electricity supply, drainage, furniture etc. Though the CAG and PAC have provided active oversight on defence procurement, the absence of a coherent defence policy weakens the quality of oversight. Further, there was no legislative oversight of India’s intelligence agencies. The alleged bribe given to government and air force officials by AgustaWestland for securing the Rs.36 billion deal[21]. Transparency International rated India in the ‘D’ or ‘high’ risk bracket for corruption in government defence [22]. Processes [21] Source: CBI seeks Italian Court’s order on AgustaWestland Graft, NDTV, 27 April 2016 [22] Government Defence Anti-Corruption Index, Regional results: Asia, Transparency International, 2015 Rs. 3.60 billion
  • 26. 26| Election Funding 1. High percentages of voters are paid in cash and drugs to lure their votes. 2. Accepting cash donations of amounts over Rs. 20,000; keeping names and details of the donors private, etc. causes a lot of opacity in the election funding system. 3. Election candidates and political parties do not honestly declare their estimated and actual election spending.The ElectionCommission has found significant discrepancies in the expenditure declared and the expenditure estimated to have actually been incurred. 4. The IncomeTax Act does not have sufficient conditions or political parties to fulfill, in order to avail tax exemption. 5. Lack of communication between IncomeTax Department and the Election Commission is a disadvantage.The present system does not allow for the Election Commission to share each party’s election candidate’s election affidavit and expenditure sheet with the income tax department. Enabling this would assist the income tax department which can then be allowed to scrutinize cases as appropriate. Estimated proportion of election funding that comes from unaccounted sources is 75%. A 2001 committee report found that a candidate’s campaign expenditure was 20 times more than the permissible limit. Statistically, candidates with declared assets of over Rs. 50 million are more likely to emerge victorious than others[23]. Processes [23] Source: A Study on Unaccounted Income in India, NationalInstitute of Public Finance and Policy (NIPFP), 2012 75% of election funding
  • 27. 27| Irrigation, Roads, PWD, National Highways 1. Due to an opaque tendering process, sub-par contractors engaged.Therefore, quality is compromised and funds misappropriated. 2. Kickbacks at all levels – from engineers, to contractors, to politicians. Approximately 22% of the tender costs in irrigation are political kickbacks – paid to everyone from the clerk to the minister in charge. Numerous such scattered incidents of corruption are found across India.These instances are symptoms of a larger problem – that of laxity in governance[26]. 3. Collusive relations between concessionaries and implementation agencies; 4. Institutional failure and laxity. Compromised quality of irrigation systems because of political and contractors’ kickbacks 5. Contractors procuring construction contracts collusively show poor performance. Malpractices and Reasons The estimated sudden suspicious increase in the cost of irrigation projects in Maharashtra[24] The biggest Public Works Department (“PWD”) scam unearthed in Karnataka[25]. Big contractors have hijacked the entire process, and the lack of transparency in publicly available data makes it more difficult to gauge the extent of corruption. [24] Source: Irrigation Scam, a Drain on Maharashtra’s Exchequer , The Hindu, 26 September 2012 [25] Source: Magadi Sub-division Scam: PWD Secretary named in charge sheet, The Hindu, 29 July 2014 [26] Source: Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012 433% Rs. 563 million
  • 28. 28| Irrigation, Roads, PWD, National Highways 1. Complicated regulatory structures and approval processes lend the sector prone to bribery and corruption. 2. Poorly implemented and monitored administrative tasks (eg: detailed project reports) leads to lesser accountability. 3. Lax redressal mechanism for aggrieved farmers, consumers. 4. No standardization of unit costs of construction. 5. Due to non mobilization and non replacement of key personnel, quality of supervision is also compromised. Additional Challenges [27] ‘Hand over road repairs scam probe to CBI, dissolve BMC’, The Times of India (Mumbai Edition), 29 July 2016 The estimate of corruption in road repairs in Mumbai over the last 3 years[27]. Rs. 90 billion
  • 29. 29| Government Schemes 1. Large bribes paid by beneficiaries to avail essential PDS services; 2. Payment system is unregulated. Beneficiaries are required to pay much higher than mandated; 3. Wastage of essential PDS goods due to lack of supervision over trucks; unavailability of goods due to callous supervision / vigilance; 4. Reselling of goods procured through the PDS system in the open market; 5. NREGS workers are paid by contractors and middle men, who make the most of this opacity and appropriate funds to themselves and other government officials; 6. Corruption and funds derailed at every bureaucratic rung of the NREG system; and 7. Inadequate worksite facilities to the NREGS workers, assets of bad quality contribute to overall failure of the system. Rampant corruption at every rung of bureaucracy contributes to the prevalence of black money[28]. The total unaccounted money in the Public Distribution System (“PDS”) Processes Or, 24% of the total amount of funds misappropriated from the National Rural Employment Guarantee Scheme (“NREGS”). [28] Source: A Study on Unaccounted Income in India, National Institute of Public Finance and Policy (NIPFP), 2012 Rs. 141.55 billion Rs. 91.69 billion