Monday, 17 Feb 2020

'The Panama Papers' offers many lessons to be learnt (Book Excerpts)

'The Panama Papers' offers many lessons to be learnt (Book Excerpts)
"The Panama Papers" by Ritu Sarin, Jay Mazoomdaar and P. Vaidyanathan has just arrived at the stands. Presented below are exclusive extracts from the book. Excerpted with permission from Penguin Random House India.

A More Equal World

Widening rich-poor divide delegitimizes wealth

Taxation is so fundamental to state power that the earliest states came into being only after humans domesticated grain crops and livestock, creating a visible, divisible, assessable, storable, transportable and 'rationable' mass of produce that could be taxed conveniently. The creation of state led to division of labour and complex social hierarchies under a ruling elite. Labour-intensive agriculture required forced labour and necessitated slavery. Since slaves were best captured, waging frequent wars and incrementally taxing people to fund those wars became a necessity. Arguably, this circle of taxation-agriculture-slavery-war-taxation did nothing to make life better for the commoner but certainly helped the elite consolidate their wealth and power. Not for nothing does a school of historians including Jared Diamond consider the advent of agriculture the worst mistake in human history.

Many millenia later, there is little evidence to suggest that humanity is preparing to turn the clock back to the pre-surplus, pretaxation days of hunting-gathering that did not harbour significant inequality. However, the surplus-centric economy we switched to has allowed the elite to draw its wealth and power from taxing the rest over thousands of years. In that historical timescale, it is only recently that a broadly global consensus has been reached in favour of bridging the rich-poor (read few versus many) divide through progressive taxation to make the wealthy meet their social responsibilities. Evidently, not everybody buys into that consensus yet and that is why tax havens and the allied financial services industry remain in business.

The Panama Papers revealed how the rich and the powerful were able to conveniently bypass their social obligations, get away with tax avoidance and tax evasion, and hide their wealth in offshore

entities. Not just in India, in most countries including the US, acquiring off-the-shelf companies in tax havens or floating offshore entities is not illegal. Referring to the 'information dump' from Panama a day after publication on 5 April 2016, then US president Barack Obama said 'Tax avoidance is a big global problem. It's not unique to other countries, because, frankly, there are folks here in America who are taking advantage of the same stuff. A lot of it is legal, but that's exactly the problem.' While the rich with access to a battery of smart lawyers are able to exploit legal loopholes and avoid paying tax, the middle-class invariably ends up playing by the rule and shelling out its due.

Obama was probably referring to the sentiments on the ground in the US. In developing countries like India, rising inequality is felt acutely given the size of the population and the lack of employment opportunities. In a recent working paper, 'Indian Income Inequality, 1922-2014 From British Raj to Billionaire Raj', Lucas Chancel and Thomas Piketty estimate that the worse hit in India during the last thirty-five years has been the middle class or the middle 40 per cent in the income group (the group between the top 10 per cent and the bottom 50 per cent income groups). It captured just 23 per cent share of the total national growth during 1980-2014, less than the 29 per cent share captured by the top 1 per cent. This, Chancel and Piketty claim, is the lowest share ever for the middle-income group since 1922.

The Indian middle class share also compares poorly with that of its counterpart in China (43 per cent) and the US (33 per cent). Since the 1980s, India has been shining mostly for the rich (top 10 per cent of the income group) who cornered two-thirds of the total national growth. While Chancel and Piketty's findings may be contested, there is little dispute that the rich are getting richer and the gap between the rich and the poor is widening.

No doubt, rising inequality is a global challenge. But if the middle class, which strongly influences national opinion in India is pushed to the wall, it can have dangerous socio-political consequences. For the ordinary person, it is particularly difficult to digest the Panama Papers revelations, since she cannot help but feel frustrated by the vulnerability of the very legal framework she so meticulously abides by. Worse still, a lack of action might only serve to reinforce a view that neither does the government walk the talk on black money and corruption, nor is it serious about addressing the rising inequalities.

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Against this backdrop (of skewered incomes), the revelations in the Panama Papers underline how India's well-heeled set up multilayered offshore structures to take money out of India. For most, the intention was to avoid taxes. Tax evasion is illegal, for sure. But tax avoidance, often materialized by taking advantage of existing laws and the loopholes therein, is not illegal, and yet it is not morally defensible in a society with rising inequality. A closer scrutiny of the Budget 2018-19 throws up some interesting figures. Out of a sample size of 6,08,836 companies, only 335 registered profit before tax of Rs 500 crore or more. Their share in total income was more than 50 per cent, and accounted for almost two-thirds of the profit before tax of all companies. But the effective tax rate for these companies was the lowest at 26.89 per cent. This is in contrast to the effective tax rate of 29.43 per cent for companies in the lowest profit-before-tax category of below Rs 1 crore. This shows that the biggest of companies, in terms of income and profits, pay the least taxes by exploiting the various preferences available in the statutes.

The revenue foregone following a plethora of tax incentives claimed by the corporate sector in 2016-17 added up to Rs 86,145 crore. For the non-corporate sector or Association of Persons, body of individuals and partnership firms, the revenue impact was about Rs 4,847 crore. For individual taxpayers, the incentives added up to Rs 64,848 crore. On export promotion, the government gave away Rs 58,607 crore under various schemes. The revenue impact of incentives in indirect taxes - customs and excise duties - added up to Rs 1,46,264 crore in 2016-17. In all, taxpayers claimed over Rs 3.6 lakh crore as incentives in 2016-17, which is approximately 20 per cent of the gross tax revenues during the year, or two-thirds of the year's fiscal deficit. This is an ongoing trend as revenue foregone in the form of incentives and tax exemptions to corporates jumped to Rs 93,643 crore in 2017-18 and further to Rs 1,08,785 crore in 2018-19. Tax avoidance hurts in a low-to-middle income country like India, particularly when the bottom of the pyramid is languishing. In their paper, Chancel and Piketty estimated that the bottom 50 per cent could get only 11 per cent of the total national growth during 1980-2014.

Ultimately, to gain the confidence of the people, the political class needs to look within and come clean on election funding. Successive governments have turned a blind eye to an expenditure item - elections - that thrives on unaccounted income or black money. Abuse of money power and the high cost of elections were two of the most important aspects flagged by the M.N. Venkatachaliah-led National Commission to Review the Working of the Constitution that studied the working of political parties and the electoral processes in 2002. For Lok Sabha elections, candidates cannot spend more than Rs 70 lakh (Rs 54 lakh in smaller states and Union Territories) and for assembly elections, the spending limit is Rs 28 lakh (Rs 20 lakh in smaller states and Union Territories). But these limits are hardly in sync with the reality of the day, and probably are just a fraction of the money actually being spent.

The high cost of contesting elections makes politicians or lawmakers depend on corporate funding. Businesses sponsor elections, and expect a return on their investment. There are many instances of the Election Commission of India seizing crores of rupees from persons close to political parties or from politicians themselves during election season. Black money is also one of the biggest hurdles in the way of free and fair elections, the most important touchstone of a democracy. Cumulative spending by candidates of all political parties during the 2014 Lok Sabha elections was estimated at Rs 30,000 crore by the think tank Centre for Media Studies. A look at the assets of members of Parliament and members of Legislative Assembly of various states reveals their ability to spend, which often determines their winnability.

In an attempt to discourage the use of black money in elections, the NDA government notified electoral bonds in January 2018. In their present form, they are a baby step in bringing some transparency to an otherwise completely opaque election-funding process. They do ensure flow of funds to political parties through the banking channel. But they also allow anonymity to donors which goes against the grain of real transparency. It is quite possible that individuals may set up a complex web of shell companies or even offshore entities to buy electoral bonds to fund political parties of their choice. As a starting point, the Supreme Court asked all political parties on 12 April 2019 to submit details related to donors, money received and other specifics, to the Election Commission. The apex court said in its interim order 'All that we would like to state for the present is that the rival contentions give rise to

weighty issues which have a tremendous bearing on the sanctity of the electoral process in the country.'

In an ideal democracy, every donation, particularly corporate funding, to political parties should be made public. Every corporation should make full disclosure about political donations to its shareholders. The voters too have a right to know who funds the party they vote for. Electoral bonds, in their present form, continue to perpetuate a veil of secrecy on election funding. Few developed countries allow such luxury, because corruption thrives in that secrecy and gains its symbiotic strength, becoming invincible.

If politics is not transparent, businesses will never be.

(Ritu Sarin is Executive Editor-Investigations with the Indian Express; Jay Mazoomdaar is an investigative reporter with the Indian Express; P. Vaidyanathan Iyer is Executive Editor-National Affairs with the Indian Express)

(IANS | 3 months ago)