VISUALIZE, if you will, the following: I’m in a small taxi in Mumbai, having just left the hotel where I stayed during a tax conference at which I spoke. Shortly after we left the hotel, the taxi was stopped by a local policeman, who waited for the taxi driver to get out and pay the expected bribe. That’s the tax cost of doing business as a taxi driver in Mumbai. In this situation, though, the taxi driver got out for what should have been a payment of INR 300. And then I got out of the cab, too. Because of my surprise appearance, the ‘‘tax’’ dropped quickly to INR 50 because none of the locals wants an outsider to observe this scene.

So how noble was my deed? It’s quite likely that I paid more than enough to cover that INR 50 tax because of the circuitous route the taxi driver took to get me where I wanted to go. Such is life in India. No matter the position one has in life, money always enters into the equation.

I spoke on March 18 at the 10th anniversary budget conference in Mumbai sponsored by www.taxindiaonline. com. The key speaker was S. Dutt Majumder, chair of the Central Board of Excise and Customs. I was lucky to see the question and answer period that Majumder conducted after. It was truly an invigorating example of what is so refreshing about Indian democracy. There was no reticence in the questions asked of Majumder, the government’s designated point man who will head the division that is expected to implement the nationwide goods and services tax. Majumder was confronted with pointed and challenging questions, and he fielded them with aplomb. I was lucky enough to speak with him at lunch.

Majumder strongly believes the GST will debut on April 1, 2012, as planned, with some possible exceptions. He said that the states opting in will be involved with the system that will start on time. The state of Maharashtra, where Mumbai is located and where 70 percent of all expected GST will be generated, will serve as anchor for this project. Majumder stated that under the proposed regulations, all goods manufactured before February 28, 2011, will not be subject to the GST, but for those states opting in, the end of February will serve as the cutoff point. India doesn’t have a manufacturing economy as much as a service sector economy. Sixty percent of the country’s GDP comes from the service sector, but only 9 percent of tax revenues come from this sector. That is why this issue is so important. Yet problems exist, not only because of political opposition but because of the need for business to change from cash basis to accrual basis accounting to meet GST standards.

S. Vijay Kumar, editor in chief of taxindiaonline and an attorney, questioned Majumder about how one can impose a service tax on Indian attorneys — after all, what true service do they perform? The statement aroused laughter from an audience that largely consisted of lawyers.

I am skeptical about the development of a nationwide GST, which will replace the VAT, which itself took 40 years to fully implement. How will you ever get two-thirds of the national legislature and two-thirds of the state legislatures to agree on anything in India? On March 26, Business Standard quoted Saurabh Patel, minister of state for finance and industries of the state of Gujarat, as saying:

The amendments put forward by the central government in the GST bill would take away autonomy of the states. VAT would no longer be the state subject. The parliament will get all the power to decide on the exemptions and tax rates.

On March 29, the state of Uttar Pradesh, acting entirely out of political motivation, reduced its VAT rates on several items of common use. Uttar Pradesh reduced rates from 12.5 percent to 4 percent, hoping to incite a cry of protest from the state’s citizens about a uniform GST rate that has yet to be fixed but could be somewhere between 16 and 20 percent. What a way to sabotage the system by lowering the current tax and creating a state deficit to build up public opposition.

It’s Black Money Time

The government has launched a new drive to find money stashed away in tax havens, described by D.P. Sengupta, former chief commissioner of taxation — Delhi, as those ‘‘generally small islands with no or minimal tax and top secrecy laws.’’ While Dubai is not an island, consider it as such insofar as the searching eyes of the Indian government are concerned. Mauritius is a well-known tax haven for India as is Singapore, which was described to me off the record by high-level Indian Revenue Service officials as being ‘‘sanctimoniously hypocritical’’ regarding its opaque bank secrecy. It makes me wonder whether Hong Kong will make its system more opaque because of its Singapore rivalry.

New section 94A of the Indian budget includes a defensive measure against tax havens, and it:

++ enables the central government to notify any country or jurisdiction that does not have effective exchange of information as a notified jurisdictional area; and

++ entitles the central government to review transactions in non-TIEA jurisdictions, where:

++ one of the parties to the transaction is located in any jurisdiction, then all of the parties of that transaction are deemed to be ‘‘participants’’ to the transaction, which will also be deemed to be an international transaction, subject to transfer pricing provisions; and

++ deductions of payments as expenditures, for tax return purposes, will not be allowed, if made in an international transaction unless the maker of the payment provides a lot of information.

And yet don’t Mauritius and Singapore have treaties (and TIEAs) with India? Is there any real meaning to these words? I don’t think so, but then this is a typical example of how things develop in India.

India does appear anxious not only to get TIEAs and treaties but also to have the treaties ratified as quickly as possible. On April 8, Finance Minister Pranab Mukherjee called on Switzerland to expedite ratification of its treaty with India, initialed in August 2010.

Johann Schneider-Ammann, Swiss Federal Department of Economic Affairs head, met with Mukherjee on a recent four-day visit to India. The Economic Times reported Mukherjee as saying, ‘‘The ratification of the agreement would put the institutional framework in place which, in turn, would result in sharing of taxation related information between the two countries.’’ The Swiss ambassador to India, also in The Economic Times, assured India that the treaty will be ratified this year by the Swiss parliament and that it will be effective, retroactive to January 1, 2011. This apparently disappointed the five people who commented on the article, who wanted this to be retroactive to ‘‘way back when,’’ in order to ‘‘nail’’ the guilty. Apparently, the concept of ex post facto is not a part of Indian democracy.

In related news, HSBC-USA is being asked to reveal 9,000 U.S. Premier accounts held by nonresident Indians (NRIs) who were told in the U.S. to secure the accounts while on a trip back to India. Apparently, only 1,921 of the 9,000 accounts have been reported back to the IRS. That the Indian government is taking seriously its fledgling campaign against black money and lost tax revenues is obvious. Its success, though, will be minimal in the beginning. There is too much money held by too many people in power, who do not wish to reveal those funds to any government anywhere. It appears that HSBC might have transgressed in telling its NRI clients to open accounts while in India. To what extent HSBC will cooperate with the IRS and its claims is open to conjecture. UBS transgressed and caved to the IRS demands — but only on 4,450 accounts. Was that a victory? We’ll never know, as we have no idea what the other 52,000 accounts held by Americans at UBS consisted of.

Legal Bribes?

In the March 22 issue of the India Business Standard, Kaushik Basu, India’s chief economic adviser, said that certain kinds of bribes should be treated as legal:

back from a tax payer till he pays some cash to the officer. Consider a case where to buy a regular train ticket, you are told that you have to pay some money under the table. These are illustrations of harassment bribes. Harassment bribery is widespread in India and it plays a large role in breeding inefficiency and has a corrosive effect on civil society.

Basu added that the entire punishment should be on the bribe-taker, with the briber not penalized at all. Under a new law proposed by Basu, all the briber would have to establish is that a bribe has been offered — via a photograph or marked currency notes.

I can think of two flaws in that proposal. First, who is going to have a camera with him to photograph the actual bribe? True, I was a witness to the taxi bribe. But most bribes are spontaneous, not planned in advance, and the taxi driver was certainly not going to take a photo of the bribe.

The second, more disturbing, question is when is a small bribe theoretically permissible under Basu’s proposals, and when does a bribe become large enough to be deemed illegal? How about it, readers? Does anyone have an answer to a not-so-theoretical question like this? Remember, this is a matter of third-world cultural ethics where extreme poverty and low civil-service wages have fostered an ethic of hush money for a long time. Culture will be part of the answer.

What struck me most during my recent India trek was the use of stars to promote paying one’s taxes.

The Times of India on March 17 had a photo of Veena Malik, a Pakistani film star in both her native Pakistan and India. She was asked the following question: ‘‘How do you pay taxes in India when Pakistani artistes are not allowed to open bank accounts in India?’’ She answered: ‘‘I pay my taxes in Pakistan and even give 40 percent of my earnings in India as taxes. They deducted the tax at the source and my money was transferred to me in Pakistan. I’ve never accepted cash for any of my commitments in India.’’

In the March 18 Times of India, Amitabh Bachchan, the ‘‘star of stars’’ in India over the past generation plus, admitted that for the year ending March 31, he, his son Abhishek, and his daughter-in-law Aishwarya will collectively pay income tax of INR 375.5 million.

So there is a civic campaign to be legitimate and pay taxes - if the stars can do it, so can you. I wonder, though, how many stars are involved with black money situations. There are enough, I gather, to make tax avoidance a problem that India will have to devote time and resources to on a long-term basis if it ever wants to change things..

(This article was originally published in Tax Analysts)