It’s a Rich Man’s World

While the rich splurge on real estate, luxury cars and private jets, is crony capitalism dictating tax policies?

MR Sivaraman Chennai

Twenty years ago, Indore, even then the most important commercial centre of Madhya Pradesh (MP), used to be a sleepy town of about a million people. Like all old Indian towns, Indore, too, used to be overcrowded, with pot-holed streets encroached upon by petty shops and hawkers. No one knew then that the city would take a quantum leap in a matter of 20 years.

Now, Indore looks different. Bursting at the seams with close to three million people, the city glitters with modern-day symbols as the BJP government endeavours to transform it into a model city. There are over 40 management and other educational institutions. Many 100-foot concrete roads criss-cross the city with a broad expressway leading to the swanky new airport. An RBTS (rapid bus transit system), the third of its kind after Delhi and Ahmedabad, has been under construction for the last few years. People close to the government claim that, unlike in other states, in MP the Jawaharlal Nehru Urban Renewal Mission (JNURM) funds are being utilised judiciously.

The not so charitable view is that such huge concrete road works are the best conduits for corruption. Evidence: When vigilance police raids even peons in Bhopal, Indore and Ujjain, the amount confiscated runs into crores, with property assets. The seizure from senior IAS officers or a chief conservator of forests is at a different level.

Besides surrounding themselves with opulence, they buy thousands of expensive cars: Mercedes-Benz, Audi, BMW, Rolls-Royce, Jaguar, Ferrari. Nearly 32,000 of these luxury cars with an average price tag of Rs 35 lakh are sold every year

While the evolution of Indore from an overgrown village in the 1960s to its present ambition to grow into a modern city of India does not surprise me, its hinterland, comprising Jhabua, Dhar, Khargone and Khandwa districts, with a sizeable tribal population, is underdeveloped and seems to be stuck in the 1960s. Hopeless poverty is visible among the tribals and people of this area. At the Indore Cancer Foundation Hospital, one can see cancer patients in torn clothes being treated free, and yet not being in a position to buy food daily.

Ironically, despite the surrounding poverty, Indore boasts of six large malls, of which three are in one row, apart from ‘Asia’s largest mall’ — under construction. Compare this with just five modest ones in Chennai. Chennai is a metropolitan port city which has the country’s automobile hub and infotech companies that together may be employing nearly half-a-million people. And yet, it does not have so many malls, or ostentatious structures, or feverish construction activity, as in Indore.

Uncannily, when the cases of these builders come up for assessment to the income tax department, they rarely bother to find out from where the money is flowing into all their coffers. Thousands of hectares of wheat tracts along both sides of the old Mumbai-Agra road are now under the occupation of these builders who are putting up all kinds of structures. Where does all this money come from? Who are the clients of the shops in the malls?

One explanation for this unusual affluence of Indore is the flow of money stashed abroad into construction activities. Another plausible explanation is that evaded tax and other forms of black money are getting invested in buildings where it is easy to launder through inflated costs. There is also a theory that anti-social elements from bigger cities are developing their bases in small towns around Indore where they will not be noticed.

Every city in India is in the grip of this real estate construction mania of high-rise buildings. As economic activity, it generates employment and adds value to the economy; however, the colour of this wealth may usually be black.

One of the buildings that got redeveloped in Mumbai, it has been alleged, generated a clean profit of over Rs 50 crore for the developer. It does not require great intelligence where this money was invested. It is a small building compared to the monstrous 1,000 flats plus buildings coming up on Palm Beach Road in Navi Mumbai. One conservative estimate is that these buildings across India create Rs 500 per square foot of black money. With the construction boom in the last few years, it is anybody’s guess how much black money has been generated through real estate.

So what does this class of nouveau riche do with this black money? 

Besides surrounding themselves with super luxuries and exaggerated symbols of opulence, they buy thousands of exorbitantly expensive cars: Mercedes-Benz, Audi, BMW, Rolls-Royce, Jaguar and Ferrari. Going by media reports, nearly 32,000 of these luxury cars with an average price tag of Rs 35 lakh, are getting sold every year. Minus the taxes, at least 45 per cent of the amount goes back to the manufacturers abroad in foreign exchange. Unless a person earns Rs 1 crore or more as annual income, it will be impossible to buy or maintain any of these cars. Do the owners pay the necessary taxes, or are they being shown as company cars and written off in company accounts?

There are 50 private jets lined up in Mumbai airport and an equal number in Delhi. There are 250 plus private aircraft and helicopters, including highly expensive jets 

There are at least 50 private jets lined up at Mumbai airport and an equal number in Delhi. As per the statistics of the Directorate General of Civil Aviation (DGCA), there are over 250 private aircraft and helicopters, including highly expensive jets. This does not include hundreds of other aircraft owned by the flying clubs.

When there is growing anxiety about the deteriorating current account deficit, why should the government allow such brazen indulgence by the rich who sometimes refuse to pay even taxes on these aircraft on one pretext or the other? Now, even expensive yachts are sailing into our harbours. Indeed, is crony capitalism dictating tax policies?

The jewellery shops in Chennai, Mumbai and Delhi are always crowded, irrespective of the gold price. So used to accepting cash, once a shopkeeper refused to sell me a necklace if I did not pay in hard cash. Subsequently, he accepted the payment by card with great reluctance. An NRI from the US had the same experience. Despite being a former revenue secretary, my complaint against the jeweller, who was generating a copious amount of black money, did not evoke any response even from the officers who had worked under me.

They cannot be blamed. Many of them are honest but unable to function due to a lack of leadership and the way the Central Board of Direct Taxes (CBDT) is structured. The CBDT has a large number of chief commissioners who hardly have any work. Why these officers cannot be exclusively used to check income generation in the real estate and jewellery sectors is not clear.

The government has the recommendation of a committee to locate the offices of commissioners of customs and income tax, with interconnectivity of their computers, in a single building at least in the metros, so that there can be smooth flow of information on black money and illicit businesses. Rarely do the CBDT and Central Board of Excise and Customs (CBEC) interact, since they are more rivals than co-workers. Raids by the income tax department or ED are publicised, but the progress in the cases or the final results are never known. Why doesn’t the opposition demand the setting up of a parliamentary committee to monitor all the cases of ‘raids’ conducted by the investigation agencies?  

The writer is former revenue secretary, Government of India, and ex-executive director, International Monetary Fund. 

This story is from the print issue of Hardnews: MARCH 2013