Shame them! Black money held abroad is not just a tax issue – R. Vaidyanathan


Shame them! Black money held abroad is not just a tax issue – R. Vaidyanathan

Of the names that have come out, three are sitting MPs, one each from Kerala, Uttar Pradesh and Haryana, and a leading business baron of Mumbai. Reuters

Dec 1, 2011

By R Vaidyanathan

A recent report in The Economic Times suggests that the income tax department has secured at least 17 “voluntary disclosures” from around 700 Indians who are alleged to have had secret accounts with the HSBC Bank in Switzerland.

Says the report: “The amount disclosed ranges from Rs 50 crore to Rs 300 crore. Many in the list have opted to file ‘revised return’ — a procedure allowed under the Income Tax Act for taxpayers who think they made a mistake while filing the original return. Revised returns are usually filed within a year of filing the original. The IT department has chosen to summon the alleged evaders and ask them to declare their undisclosed offshore deposits rather than initiate prosecution proceedings.”

Of the names that have come out, three are sitting MPs, one each from Kerala, Uttar Pradesh and Haryana, and a leading business baron of Mumbai. Reuters
According to the newspaper, this has been done for two reasons. One, the tax department does not have enough manpower to go after all the 700. Moreover, since the HSBC names are from a stolen list, the department is “not in a position” to verify it. “Such a list has to be certified by the Swiss authorities before it can be used as evidence in any court of law. Both the tax office and taxpayers are in a tricky situation.”

If this report is right, it reveals two things regarding this government — its duplicity and lies pertaining to the data and also its audaciousness in treating illegal money abroad as simply a revised income tax return issue.

First, the duplicity. The government has always maintained that since this data has been obtained under double taxation treaties, the names cannot be revealed. Now it says since it is stolen data it is not possible to verify with the banks. Stolen data does not come under any double tax treaty. More important is the fact that the government is trying to treat the whole issue as a minor issue and ask the criminals to file revised returns. It is like administering a slap on the wrist for murder.

The government is also claiming that the names will be released once the prosecution starts. But the newspaper report suggests that the government is trying its best to settle all issues by collecting some tax since prosecution can be painful and expensive. It also suggests that the government does not have manpower.

When the floodgates open and hundreds of thousands of names get revealed will the government just keep quiet due to lack of manpower? One hopes the police and other departments do not follow this logic to wink at crimes due to lack of manpower.

What are the real issues in these illegal funds abroad? There are at least four lists around: one is a stolen list from Liechtenstein Bank, which came to us via Germany; the second is from HSBC’s Swiss branch; the third and fourth ones pertain to many banks (mostly stolen) in Denmark and Finland.

Of the names that have come out, three are sitting MPs, one each from Kerala, Uttar Pradesh and Haryana, and a leading business baron of Mumbai. The government, in a belated move, has refused to acknowledge the names. It is always suggested that one need not believe rumours unless these are denied by the government.

There was another report in which suggested that the names may contain many BJP leaders. This should be all the more reason for the government to reveal the names.

It is important to recognise that illegal money kept abroad is not just an income tax issue. Such money could have been accumulated by overinvoicing imports and underinvoicing exports. Sometimes called trade mispricing, customs duty may also be involved. Plus the said sum might have evaded commercial tax/entertainment tax, in which case it is part of state government losses.

In a federal structure like ours, the data should be immediately shared with state chief ministers. I am amazed that no chief minister, including those of the opposition parties, has made this demand.

It is also possible that the money was accumulated through goods smuggling or by way of commissions in major projects or gun-running or drug financing or trafficking of women. Former National Security Advisor MK Narayanan had warned, as early as 2007, about terror funds getting into our banking system and stock markets. If the HSBC list relates to any of these activities, then just filing a revised return is totally inappropriate and inadequate.

We can cite two recent examples of the lies of the government. The response of the government in the Supreme Court (in the Ram Jethmalani case) indicates that tax demands of Rs 71,848 crore have been raised against Hasan Ali Khan, his wife and other associates. If this is the tax demand, then the income on which this would have been raised could be more than Rs1,50,000 crore. This is a mind-boggling figure since our national income for the current year is of the order of Rs 60,00,000 crore.

But something more interesting has been reported. The Swiss authorities told a news magazine that the Indian authorities had sent a request in January 2007 for legal assistance in the Hasan Ali Khan case but the documents were not valid.

The Centre, in an affidavit to the Supreme Court, had detailed the action it had taken against Hasan Ali Khan, his wife Rheema and Kolkata-based businessman Kashi Nath Tapuria, who allegedly were holding about $8 billion in an UBS account in Switzerland. In a communication from Folco Galli, information chief of the Swiss Department of Justice and Police, Berne, the magazine, Hardnews, was informed that the Indian authorities had submitted “forged” documents to seek assistance.

In its May issue, the magazine said the Swiss sought more information. “Swiss authorities want to provide further assistance in the case if the Indian authorities could satisfy the Swiss government’s demand to establish dual criminality – what is crime in India is a crime in Switzerland. The Swiss also wanted to know whether the offence was an object of Indian money laundering. Since April 2007, the Indian government has not responded.”

The whole issue is becoming curioser and curioser.

On the list provided by the German authorities, the government maintains that it cannot reveal the names since it has been obtained under the double taxation treaty. But it says that it is proceeding against account holders under tax laws. The question is: why did the government ask for information under the double tax treaty from Germany, when the names are from Liechtenstein?

Moreover, where is the issue of confidentiality vis-a-vis criminals? Germany has released its own list and how will they now ask India not to release the list?

The finance ministry says it has names but will not reveal them and the affidavit suggests that the petitioners should go through the Right to Information route. Of course, the RTI application will be thrown out. We have a story in Tamil — the beggar is refused food by the daughter-in-law and thrown out of the house. The mother-in-law sees him on the road and, on hearing what happened, gets furious and brings him back home and then tells him there’s no food, but “I am the one eligible to say that and not her”.

These are not domestic tax evaders but international crooks that have deprived our land of huge amounts of resources by stashing capital away. What they have done is an unpatriotic act which can be equated to financial terrorism. Why keep their names a secret?

Julian Assange, in an interview to an Indian television channel, has clearly indicated that Indians account for a large number of Swiss bank account holders. He also recollected that many banks entertain customers only with a minimum of Rs 5 crore in assets. In another interview the Swiss whistleblower, Ruedi Elmer, has indicated that the names of account holders include Bollywood icons and sportspersons. Obviously, no aam admi is going to find mention on all these lists.

The government’s hesitation may be due to the fact that some of the accounts belong to powerful people in the ruling coalition.

Since all the organs of law enforcement have been consistently emasculated and made emaciated, it is difficult to expect any punishment for the lot through the legal process. Naming them and bringing them to shame is a good way to handle them.

It is a painful reality that we have reached a situation where it is perceived that all members of our elite are guilty until proved innocent. The reason is the low level of trust in our political masters and the judicial processes where the accused can prove their innocence by hiring the costliest lawyers. It is critical that the names are released so that the social media does not get into a guessing game and holds everyone suspect.

It is also important that some major leaders take the initiative on the issue and provide an affidavit to the president of India suggesting that neither they nor their families hold any illegal funds abroad. Moreover, if the government finds any such funds, let it be confiscated. Such a voluntary declaration by senior leaders will have a dramatic impact.

One senior official asked me whether releasing the names will have a cathartic effect on the middle class since many an icon will be revealed to have feet of clay. My response was civilisations do undergo such a catharsis once in a century. But it is required that our collective conscience is made clean and a fresh start in made.

The illegal funds kept abroad by our fellow citizens are not just a tax issue. It is treason. It is an issue which is linked closely to our core civilisational values.

R. Vaidyanathan is professor of finance and control, Indian Institute of Management, Bangalore. The views expressed are personal.

Baba, here’s a Dummy’s Guide to black money & tax havens

Jun 3, 2011

By R Vaidyanathan

Baba Ramdev wants it back, or else…. The government claims it is on the trail, but…. Anti-corruption crusader Prashant Bhushan works up a lather over it and even lambasted a former Supreme Court judge recently for upholding a law that enabled businessmen to save taxes by registering themselves with post-office addresses abroad. Business tycoons are mum on the subject.

Yes, we are talking about tax havens abroad, the place where businessmen allegedly stash away their illegal wealth.

But what are tax havens really? Why do postage-stamp countries like Liechtenstien or the Cayman Islands host them? And why do businessmen and politicians keep their slush money there instead of equally unholy – but handy – places back home? Here’s a Dummy’s Guide to tax havens.

What are tax havens?

Tax havens are countries or principalities or near-sovereign territories that allow you to pay little or no tax and also guarantee you secrecy about the funds you hold in their banks. They are called by other names, too, like offshore financial centres, innovative financial centres, etc, depending on your inclination. One man’s innovations are another man’s black money.

More than half of world trade passes, at least on paper, through tax havens. Getty Images

What is black money? How do I know if the money I get from the shopkeeper is black or white?

It’s not the colour. Black money is simply income on which taxes have not been paid. If you pay your builder cash for booking a flat, you are generating black money for him. Every time you buy something without a bill, you may be facilitating black money generation.

How are tax havens defined?

Nicholas Shaxson in his book Treasure Islands suggests that a tax haven is a place “that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere.”

It is similar to the definition offered by Richard Murphy of Tax Justice Network. Shaxon also suggests that more than half of world trade passes, at least on paper, through tax havens. Over half of all banking assets and a third of foreign direct investment by multinationals corporations are routed off shore.

How many tax havens exist currently?

There are presumably more than 70 tax havens in the world. At least 40 countries/territories market themselves aggressively as tax havens

(Source: Internal Revenue Service, USA, on Abusive Offshore Tax Avoidance schemes –Talking Points, January 2008)

The well-known tax havens are Switzerland, Liechtenstein, Luxembourg, Channel Islands, and Cayman Islands, among others.

Who uses these tax havens?

Of course, tax dodgers and other assorted varieties of crooks helped by institutions and entities like banks.

Raymond W Baker, in his pioneering work on tax havens, says: “I have lost count of the number of anonymous entities existing in these jurisdictions. Several years ago, the British Virgin Islands alone reportedly had 180,000 and the Caribbean as a whole had 500,000. More were being formed at a reported rate of nearly 200,000 a year. The total is certainly well over a million by now, and some experts put the number as high as three million. According to various estimates, half of cross-border trade and investment passes through a tax haven or a secrecy jurisdiction at some point along the way”.

(Capitalism’s Achilles Heel: Dirty Money and how to renew the free market system, page 36, John Wiley & Sons Inc, NJ 2005I).

The US Government Accountability Office reported in 2008 that 83 of the USA’s biggest 100 corporations had subsidiaries in tax havens. Tax Justice Network discovered that 99 of Europe’s 100 largest companies used offshore subsidiaries. In each country the largest users by far were banks.

How much money is stored in these havens?

This is a tricky issue since we are talking about unaccounted or black money. There are estimates, but each one comes with an assumption. There are three interesting questions: How much global money is there in all these tax havens? How much Indian money is stashed away illegally here? How much Indian money is, specifically, in Swiss accounts?

First, let us look at the volume of the untaxed black money that is estimated to circulate in and dominate the global financial markets unquestioned and unsupervised. These monies, which have no declared or known owners, are laundered into the official financial markets of the world through the intervention of tax havens, which are countries that levy no tax or levy what is an apology for a tax, so as to attract capital. These tax havens are largely tiny-tots in the global geography and demography but they hold the rest of the world to ransom, as explained in detail later. These are currently called “secretive jurisdictions”.

Now, let us see the latest estimate of the volume of the black money that traverses through the financial system of the world.

The International Monetary Fund (IMF) estimated in 2010 that the balance-sheets of small island financial centres alone added up to $18 trillion — a sum equivalent to about a third of world GDP (Shaxon). The IMF estimates the size of global black money — excluding Switzerland, China, Taiwan and the oil-exporting economies — at US$ $18 trillion. But that’s still an underestimate, says the IMF!

Gian Maria Milesi-Ferretti, an economist for the IMF in Washington, said statistical information on Luxembourg, one of the largest offshore financial centres in Europe, illustrated the extent of the problem. He said: “Luxembourg is one of the few offshore centres that disclose detailed statistics on assets and liabilities held in the financial sector, which makes it invaluable to understand cross-border money flows.” (Just to recollect our school maths, one trillion is 1,000 billion and 100 crore make a billion; GDP is Gross Domestic Product, which is a nation’s income in a year.)

The latest available IMF figures show portfolio assets held by foreigners in Luxembourg to be worth $1.5 trillion at the end of 2008. But looking at statistics provided by the Luxembourg government on portfolio investment liabilities for the country – the mirror image of the asset information held by the IMF – there is a big discrepancy. The investment liabilities in Luxembourg were $2.5 trillion – $1 trillion (€726 billion) more than the assets reported.

Milesi-Ferretti said: “This is a huge difference, almost 40%, and is unlikely to be entirely accounted for by the fact that some countries do not report their portfolio investments or their destination to the fund.”

How much Indian money is kept abroad?

Global Financial Integrity (GFI) — a non-profit research organisation working in the area of tax havens — has estimated that the present value of illegal financial flows held abroad is nearly $500 billions. Our GDP at the time the report was made was nearly US$ 1,200 billon. This means nearly 40% of our national income is held outside the country. Baba Ramdev and Anna Hazare are on the right track, but whether a fast will get the money back is anyone’s guess.

Here are some numbers in rupees: At Rs 45 to the dollar, the money stashed abroad comes to Rs 22.5 lakh crore (Rs 2,250,000 crore. At the time of the general elections in 2009, experts of the Congress party had disputed the very existence of large volumes of black Indian wealth held abroad.

But there can really be no dispute about the broad size of Indian wealth stashed away abroad. GFI says that more than two-thirds of this amount has been stashed away after the liberalisation of the Indian economy in 1990s. It means that those aspects of liberalisation which facilitated this process must be scrutinised as part of the preventive efforts needed to tackle the accumulation of Indian black wealth abroad on an ongoing basis. (Even Prashant Bhushan has a point).

Now let us look at what kind of black money from elsewhere is lodged in secret Swiss bank accounts. Nearly 1 trillion out of 2.8 trillion Swiss francs (CHR) is black money, says Konrad Hummler, Chairman of the Swiss Private Bankers Association. (See August 2009 Swiss Review, “Atlantic hurricane hits Switzerland in full force”). Julian Assange of WikiLeaks fame has told an Indian TV channel that Indians are the largest investors through Swiss banks. This means out of US$ 1 trillion (the Swiss currency is actually a bit costlier than the US dollar, but we are looking at ballpark figures here). more than half could be owned by Indians. This alone comes to US$ 500 billion. And this is only bank deposits.

Is money kept in instruments other than deposits?

There are other exotic financial products offered by Swiss banks — offshore also — where Indians are invested. Plus there are funds accumulated directly abroad through commissions in defence contracts (remember Bofors?), which is not going out of the country. It just doesn’t come in.

The International Narcotics Control Strategy Report (Money Laundering and Financial Crimes, March 2009, by the US Department of State suggests that 30-40% of the inflows may be sent there by hawala (Couriers take money in rupees, convert it to dollars abroad, and then deliver it where it is needed. They also do the reverse: take dollars abroad, convert it to rupees, and being it back during election time).

During 2007-2008, according that report, formal inflows were US$ 42.6 bn (and so 40 percent of this, $18 bn, could be reflected as illegal “flows” not captured by the law). This sum could be paid for in rupees here but stored in tax havens abroad. These hawala deals are for only one year.

Hence one can conclude that GFI’s estimate of US$ 500 billion is a conservative one and $1.5 trillion could be the outer limit. This means the volume of black money held abroad could be anywhere between Rs 22.5 lakh crore and Rs 67.5 lakh crore at current exchange rates of Rs 45 to the US dollar.)

More than half of world trade passes, at least on paper, through tax havens. Getty Images

That’s nothing to sneeze at. We will see in our next instalment how it went and how to bring it back.

R Vaidyanathan is Professor of Finance at IIM, Bangalore


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