The issue of black money has taken centre stage following revelations of bad governance in 2G auctions and CWG spending. The recent strictures from the apex court regarding the government?s (in)action in tracking black money outside the country has only raised the profile of the issue in the public domain. But what is the best the government could have done to bring back the big illicit funds perceived to be stashed in tax havens?
In the past, governments have introduced amnesty schemes, which might have helped uncover domestic black money to some extent but not much from overseas banks. So the option has been ruled out this time. The only thing that can be done now is to renegotiate the Double Taxation Avoidance Agreement (DTAA) that India has with 79 countries. This agreement comes with secrecy conditions and it has less information regarding illegal money trails as it deals only with civil tax matters. A better alternative is the OECD model of Tax Information Exchange Agreements (TIEAs), which ensure effective exchange of information and reduce harmful tax practices. This model, which was developed after 9/11 largely to track funding of terrorist activity, also helps in criminal tax investigation rather than just civil tax matters. India has recently completed 10 TIEAs and some are under negotiation, including one with Liechtenstein.
It is also very important to renegotiate the agreements with Mauritius and Switzerland, perceived to be the two main destinations for India?s black money. A recent OECD study shows that there are many loopholes in the Mauritius agreement that help in routing black money from India.
In addition to improving bilateral agreements with tax havens, the government needs to focus more on curbing the generation of black money in major economic activities. For example, the realty sector can create substantial black money as its transparency levels are very low, with poor land records and poor valuation systems. The other way is to improve governance mechanisms, which is easier said than done. The government has rightly unveiled some structural policy changes in the legislative framework, for setting up relevant institutions to deal with black money, for developing systems to impart skills to tax authorities. This has become more relevant as there have been substantial advancements in technology that make transactions more complex and difficult to track. It is also necessary to strengthen the skills of the Enforcement Directorate as money laundering appears to have become rampant of late.
At the global level, with India playing a prominent G20 role and being a member of the UN Security Council, there is a need to step up pressure on the tax havens to ensure the cross-border exchange of information. All these measures will only contain illegal cross-border movements of the future rather than already existing overseas funds, as the long delay in agreements would alert those who have already stashed money outside. But the seriousness of the government in improving both institutional structures and capacity could minimise tax compliance risk substantially and improve India?s fiscal condition.
The author is a professor at NIPFP. Views are personal
Arun Kumar
Governments in India have expressed their inability to bring the huge hoards of money held abroad by the Indian rich?the corrupt businessmen, politicians, executive and so on. It lies in some of the 77 tax havens in the world; Switzerland being the most well known.
All manner of tricks are used to hide the trail through which money is spirited out of the country. Hawala channels, under- and over-invoicing of trade and so on are used. Dummy or shell companies are used to hide the money trail; that is why the true beneficiaries of the Bofors money remain untraced. The tax havens provide secrecy to their depositors so that they may become untraceable and funds earned in illegal activities, like bribes and narcotic drug trafficking, are parked there.
The movement of the black money abroad is facilitated by the MNC banks that have subsidiaries in the tax havens. In the name of investments, they help their high net worth depositors to move funds. When the failing Fortis bank of the Netherlands was taken over by the government in 2008, it was found to have 700 subsidiaries in tax havens.
There are two aspects of the black wealth held abroad. First, the continued siphoning of funds from the country needs to be stopped. Second, what has been taken out in the past needs to be traced and brought back. For the former, the black income generation in the country needs to be curbed. For the latter, Indians in India who have taken their wealth outside the country need to be brought to book. It may be argued that since both these activities involve illegality and secrecy, the government will not get to know and therefore cannot act.
While the government does not officially know what is going on, in their personal capacity, the functionaries of government?the politicians, the bureaucrats and the police?know what is going on since they indulge in these activities themselves. The hawala operators and their places of operation are known to the government functionaries since they use such services. The Mauritius route was deliberately set up by policymakers to bring back their black funds through round tripping.
If the government was serious, the problem could be tackled at its root since information is available with the intelligence agencies and the individuals in government. Once those sending their funds out are caught, they can also be forced to reveal both their sources and their funds held abroad. The Birkenfeld case in the US provided the government the leads to catch the UBS bank (and fine it to the tune of $750 million). In contrast, in India whenever information becomes available, the investigative agencies bend over backward to spoil the case, as in the recent Hassan Ali case or in the earlier Bofors case.
Since those in power (yesterday or today) are the ones who hold the money stashed abroad, can they be expected to catch themselves? In the absence of political will to act, another committee is set up.
The author is a professor at the Centre for Economic Studies and Planning, JNU