India tackles entrenched culture of tax dodging; “In a country of holier than thou’s, no one thinks that it’s a blatant lie” to cheat on your taxes”

India tackles entrenched culture of tax dodging

BY TIM SULLIVAN

AP, APR 6, 2013

NEW DELHI – In a country long defined by its poverty, it’s now easy to find India’s rich.

They’re at New Delhi’s Emporio mall, where herds of chauffeur-driven Jaguars and Audis disgorge shoppers heading to the high-end designer stores. They’re shopping for Lambor- ghinis in Mumbai. They’re putting elevators in their homes and showing off collections of jewel-encrusted watches, and they’re buying real estate in comfortable but unpretentious neighborhoods thought of as simply upper-middle class just a couple years ago, where apartments now regularly sell for millions of dollars.

They’re just about everywhere — unless it’s income tax time. Then, suddenly, they barely exist.

The reality is simple: “There are very few people who are paying taxes,” said Sonu Iyer, a taxation expert at Ernst & Young in New Delhi. And tax dodging is everywhere, he said: “It’s rampant — rampant.”If the generalities of that have long been known, Finance Minister Palaniappan Chidambaram stunned the country in late February when he proposed a new tax on India’s top earners. The surprise wasn’t the temporary 10 percent surcharge on those earning more than 10,000,000 rupees (about $185,000) per year, but the number of Indians who fall into that category. That number? Just 42,800 people. “Let me repeat,” Chidambaram told Parliament in his budget speech, making sure no one thought he had misspoken, “only 42,800″ people say they earn that much.

In a 1.2 billion population, a country where years of staggering economic growth annually create tens of thousands of new dollar millionaires and a recent slowdown has done little damage to a thriving luxury goods market, far less than one ten-thousandth of the population admits they are in the top tax bracket.

With so few Indians willing to come clean, the perennially cashed-starved government has to scrabble for revenue every year.

Among the rich, dodging taxes has become second nature, said Jamal Mecklai, CEO of Mecklai Financial, a Mumbai-based financial consulting firm. About 158,000 Indians are thought to be dollar millionaires, according to a 2012 Credit Suisse estimate, though some analysts believe the number is far higher. “It’s just taken as the reality” that most wealthy Indians are cheating, Mecklai said, adding that he pays all his taxes. India’s top tax rate is currently 30 percent.

It’s not just the rich who are evading their taxes. Less than 3 percent of Indians file income tax returns at all, and officials say only about 1.5 million taxpayers say they earn more than 1 million rupees ($18,000) per year.

Most of those not paying have legitimate reasons. Well over half the population earns so little they don’t have to pay income taxes. Despite its ever-growing population of nouveau riche, more than 400 million Indians still live below the poverty line.

Millions more are exempt because regulations exclude agricultural income from taxes, no matter how much is earned. Since India has hundreds of millions of small farmers, and a powerful bloc of wealthy farmers, that’s a tax break few politicians dare challenge. Various other tax breaks legally keep many more people off the tax rolls.

The bulk of those paying income taxes, experts say, are salaried employees whose companies are responsible for making their tax payments. While those taxpayers can fudge their numbers to an extent, using inflated receipts to magnify tax breaks on expenses such as housing, it’s extremely difficult for them to completely escape tax authorities.

But most others — from the barons of family-owned businesses to doctors, lawyers and small traders — operate in largely cash economies that enable them, if they want, to hide most of their income.

The size of India’s underground economy and the amount of lost taxes is widely debated, but even the lowball figures are immense in a country with a nearly $2 trillion gross domestic product. In recent studies, experts estimated that anywhere between 17 percent and 42 percent of the economy operates beneath the official radar.

Billions of dollars are widely thought to be stashed in Switzerland, Singapore and other havens.

Then there is the strange case of Mauritius. More than 40 percent of foreign direct investment in India comes through this tiny island in the Indian Ocean. In part, that statistic reflects an India-Mauritius tax treaty that legally eases the flow of investment funds into India. But, experts say, it also allows Indians to launder vast amounts of untaxed wealth by sending their illegal cash to Mauritius, then “round-tripping” it back to India in the form of legal investments.

If it would take concerted effort to shut down complex, international money-laundering operations, catching at least some of India’s high-end tax dodgers should be ridiculously simple. India is, after all, a country where flaunted wealth often seems as common as traffic jams.

How about targeting the purchasers of the 25,000 luxury cars sold last year? Or the buyers and sellers of big-budget apartments? What about those racking up thousands of dollars a month in credit card bills? While the government says it recently has begun targeting some big spenders, mailing notices to tens of thousands of people it they claims say may have underpaid their taxes, few believe officials have truly become aggressive.

“It’s not really that difficult to chase down the tax dodgers,” said Mecklai, the consulting firm CEO. “It”s just a matter of putting the machinery in place.”

“Of course I don’t pay all my taxes,” said a New Delhi businessman speaking on condition he not be named because he admitted breaking the law. “Why should I pay my taxes while the politicians are getting richer and richer every day?”

Such talk is, experts say, the most commonly heard rationale for tax evasion, one entrenched by decades of political corruption and waves of official scandals.

But it doesn’t explain everything. Iyer, the Ernst & Young tax expert, noted that the culture of tax-avoidance runs deep in India. She pointed particularly to the way buyers and sellers of real estate openly discuss how much of the price will be paid in “white” declared money and how much under the table in “black” funds.

“No one thinks of it as something to be ashamed about,” she said. “In a country of holier than thou’s, no one thinks that it’s a blatant lie” to cheat on your taxes, she said. Embarrassment, according to Iyer, may be what India needs most of all. “The moment this society establishes a stigma to it, I think you’d see a change,” she said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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