The eruption of popular outrage over the NDA government’s refusal to
name those Indian citizens who have stashed black money abroad is
understandable: after all, every NDA leader from Narendra Modi to Baba
Ramdev, and even going back to LK Advani in 2009, had made the UPA’s
failure to reveal the names a campaign issue. Indeed, one of the more
popular campaign promises of the victorious Narendra Modi campaign in
2014 - and the most difficult to fulfill - was his commitment to
“bringing back” to India “within 100 days” the billions of dollars of
“black money” reputedly stashed abroad by tax evaders, corrupt officials
and the like.

No one in our country disagrees that black money is a serious
problem, or that the black money squirreled away abroad should be
identified and brought back, if possible. Black money is particularly
pernicious for a developing country like India, because it siphons
resources away that could be spent for much needed investments in
health, education, roads and general public welfare. There were debates
on black money in each one of the first eight Lok Sabhas, but despite
learned judges like Santhanam and Wanchoo heading Committees that issued
voluminous Reports, the problem seems only to have got worse over the
years.

Black money in India is generated by various practices:
real estate transactions, diversion of Government resources from welfare
programmes, kickbacks on Government contracts (especially those
involving international procurement) and malpractices in international
trade, especially under-invoicing.

What is the scale of the
problem? Various numbers, including some fanciful ones, were flung about
in the course of the political debate on the issue. One Internet and
SMS allegation doing the rounds, and cited by the yoga guru and
black-money crusader, Baba Ramdev, claims that it is Rs.1,456
lakh crores of black money. That would be equivalent to some 30
trillion American Dollars, whereas our entire GDP is only 1.5 trillion
– so something like 20 times our current GDP is supposed to be
illegally sitting abroad! We should probably not get our economics from a
yoga teacher.

The more realistic number of the ones generally cited comes from a widely-circulated report called The Drivers and Dynamics of Illicit Financial Flows from India 1948 to 2008,
published in November 2010 by the reputable US-based organization
Global Financial Integrity. It concludes that since 1948, we have lost a
total of 213 billion dollars in illicit money, the present value of
which in today’s dollars would be about 462 billion, or 20 lakh crores
of rupees, which is serious money.

Even when it comes to Swiss
banks, the burden of the BJP’s song for some years now, official Swiss
bank figures show that only 0.07 per cent of all the assets in Swiss
banks are held by Indians - some $ 2.5 billion dollars out of $ 3.5
trillion held in Swiss banks by foreigners, or under Rs.10,000
crore. We are not, therefore, the country with the largest Swiss bank
deposits (”more than all the other countries combined,” one BJP MP had
alleged while in Opposition). Even one illegal rupee in a Swiss bank is
unpardonable. But the real dimensions of the problem should be
understood accurately.

In any case, Swiss banks are a
red-herring in the black-money debate. Swiss banks pay one per cent
interest at the most; it is highly unlikely that Indians with black
money are leaving it there, and far more probable that the bulk is being
reinvested more profitably elsewhere, including in our own country. Why
not? In India, in the last decade, housing prices have risen ten times
since 2000, the Sensex has gone up six times, and Government bonds offer
8 per cent while the best terms abroad are at 3 per cent. This makes
India a very attractive investment destination for Indian money, which
can be routed back to the country in a practice called “round-tripping” -
taking illegal money out but bringing it back as a legitimate
investment, especially through investment havens like Mauritius.

In
our desire to facilitate foreign investment, we have unwittingly made
“round-tripping” easier  through, for example, the anonymity guaranteed
by participatory notes: 55 per cent of the foreign institutional
investments in India in 2009-10, totalling $ 85 billion, were made
through the participatory notes route. Whereas our domestic investors
have to fulfill stringent ‘know your customer’ norms, these are much
more lax for participatory notes. While we need productive investments
from abroad, we must not allow them to become a contemporary equivalent
of the old “voluntary disclosure schemes” under which the Government
used to soak up black money.

At the same time, there are specific
concerns. 40 per cent of the total FDI coming into India comes from
Mauritius. We have been trying to renegotiate the tax treaty we have
with Mauritius, but inevitably our strategic interests in that country
will affect how far we can push its Government to accede to our demands.
The fact is, however, that there is no taxation on capital gains in
Mauritius, so that if an entity sets up a paper company there, our
Double Taxation Avoidance Agreement becomes in fact a double
non-taxation agreement for us. Our Income Tax Department had the power
to examine and verify whether the resident status of a company in
Mauritius was genuine or not. The NDA Government, whose leading lights
are today waxing indignant on the issue, withdrew that power by Circular
789 of April 2000, under which a simple certification from the
Mauritius Government is now accepted. This has rendered “round-tripping”
from Mauritius much easier, because India no longer has the power to
question the residential status of a company there.


It
is also mildly amusing that some of the BJP leaders seem to presume
that tax haven countries are just waiting to hand over information and
money to us, if only our Government is tough enough to ask. The opposite
is true. Whatever India can do in relation to the banks of foreign
countries is subject to the domestic laws of those countries and of
course of international law, including treaties to which India is a
party. Under the Indo-Swiss DTA Agreement, information on Swiss bank
deposits cannot be revealed by them until we provide the names of the
individuals we are investigating, of the banks where they have their
money, and evidence of criminality. The Swiss have made it clear they
will not support “fishing expeditions” for names in their banks. In
addition, we are bound to secrecy clauses; releasing names (except for
prosecution) would violate our undertakings and jeopardize future
co-operation.

No wonder that Switzerland is ranked number one on
this year’s Financial Secrecy Index compiled by the Tax Justice
Network. Since 1934, breaking bank secrecy is a criminal offence in
Switzerland, whereas tax evasion is not a crime under their law.

To
suggest that the Government of India under the UPA has not been strong
in its efforts is particularly unfair because, since the Pittsburgh G-20
Summit in 2008, India has led the push in the G-20 against banking
secrecy and opaque cross-border financial dealings that protect black
money. India has joined the Financial Action Task Force, and pushed the
G-20 to restructure and strengthen the OECD’s Global Forum on
Transparency and the Exchange of Information for Tax Purposes. The Head
of the Global Forum on Tax Transparency rates India “first in terms of
promoting the standards, in terms of fighting tax evasion, and having
the international community lining up behind it.” Similar praise has
come from the Director of the OECD Centre for Tax Policy and
Administration. And this was all for the much-maligned UPA government.
 
Many
speakers in the Lok Sabha debate on black money in 2011 referred to
Hasan Ali Khan, the Pune stud farm owner with billions stashed abroad.
But though the case is shocking, he did get caught: his prosecution is
evidence of the Government at work to pursue the holders of black money
abroad. The fact is that there is a lot of domestic black money too —
notably in politics. Election campaigns are awash in black money; most
candidates are reputed to spend far more than the permissible limits,
and the difference has to come in unaccounted (i.e. black) money. Root
and branch reform is necessary.

While it is very easy to shout
slogans or clamour for political change, the real question the country’s
political parties need to ask is what can we do together to resolve the
problem of black money. I would like to suggest a brief list:  we have
to tackle the problem of tax evasion, which would require cooperation
with the Government on tax reform and rationalization and on financial
sector reform.; we need to incentivise compliance; we have to tackle
black money coming from real estate, which again requires cooperation on
effective land titling, on reformed land revenue and land record
systems, and the elimination of policy distortions, including
rationalizing taxation, such as onerous stamp duties which promote
evasion.

We have to tackle black money in education, which means
removing the scarcity of good education supply in our country, which
permits some colleges to take black money to provide access to good
education. We need effective implementation of government-spending
programmes, especially their financial management. Action to strengthen
law enforcement and criminal justice will help eliminate
terrorism-related funding, which also relies on black money. And we do
need to tackle electoral reforms to ensure that politics does not remain
a major locus of black money. The Lokpal Bill is one of several
measures needed to tackle corruption effectively.

In other words,
I would respectfully say to the BJP leaders who campaigned to bring the
Modi government to power in the name of returning black money that it
would be far better to work together to deal with the real problems
facing this country. Instead of adjourning the House as the BJP
repeatedly did over the issue, we need to use the House to create the
policies and reforms that will enable us effectively to deal with black
money here and abroad. I am sure the new Opposition stands ready to
co-operate with such an endeavor.

Indian Black Money in Swiss Bank List by Wiki Leaks