Tax evasion is a universal phenomenon but as far as its incidence goes,
is perhaps amongst the top ten countries where taxes are routinely avoided. Partly this is because of the lax enforcement of tax rules. But partly it is also because of the demands of the political system which requires a constant supply of cash. One reason or the other,
has a very large black economy, i.e. an economy which is based on the generation of tax evaded income. Some guesstimates put the percentage as high as 40 per cent of GDP. Obviously, money laundering is big business in
. And it is sustained because of the high degree of political support that it receives.
A bill to enact the Prevention of Money Laundering Act has been before the Lok Sabha for a couple of years. But it has not shown any sense of urgency to debate it, let alone pass it. Instead, all kinds of objections have been raised against the bill. The most ingenious one is the claim that some of its more draconian provisions could negate the process of economic liberalization. Thus, it is argued that world-wide, money laundering prevention has focused on drugs and cross border prostitution, but that under the money laundering bill a person commits the offence of money laundering if he uses the proceeds of a crime to acquire property or transfer money or takes part in an activity which is directly or indirectly criminal, and conceals or aids in concealing the proceeds of a crime. This is different from the notion of black money which is related to tax evasion and can arise from perfectly legal activities as well.
The main reason why the money laundering bill has not been passed by Parliament – or even taken up for serious discussion – is the fact that a great deal of political funding can be traced to criminal activities. While these may not always or even usually be related to drugs, prostitution or gambling, the fact remains that they arise from criminal activity. The money laundering bill has not defined what a crime is for its purposes, choosing instead to rely on the normal Indian Penal Code to determine if an act is criminal or not.
The danger to national security from the existence of such a large black economy is simply that it makes criminal activities that much easier. Gun running, in particular, is now rampant, and this has encouraged not just the mushrooming of extremist groups but also the slow of arming of the population at large.
Another direction from which the danger comes is smuggling, which is financed wholly by the proceeds of the black economy. The government has sought to reduce smuggling by attacking the root of the problem, namely, high duty rates. But there is no indication that there has been any major diminution in the total volume of smuggling. All that may have happened is that the items which are smuggled have changed. Weapons are the major business now, replacing perhaps even gold.
National security can also come under threat in a more indirect and long term manner because the presence of so much tax evasion weakens government finances which then seeks to make up the gap between revenue and expenditure through borrowing. This pushes up interest rates, which makes investment more expensive and which, eventually, shows up in lower growth rates of the formal sectors of the economy. While the direct connection is not obvious, it takes no special perspicacity to see that a weak economy is likely to be under greater threat than a strong one, besides leading to an erosion of sovereignty as the economy needs to accommodate the dictates of the creditor countries.