FINANCIAL SCENE
Bringing back Indian money in tax havens
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Public perception has remained strong of domestic money being stashed away illegally in Switzerland
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If tax avoidance is the reason forthe flight of funds, it will be difficultfor the union government to layits hands on the entire depositsof indians in tax havens.
— FILE PHOTO
HIGH STAKES: Swiss bank UBS at Paradeplatz square in Zurich.
The issue of bringing
back to the country
money allegedly
stashed away by Indians
in Swiss banks and certain
other centres has once
again become topical. Just
before the general elections,
senior BJP leader L. K. Advani
released the findings of a
taskforce on the subject appointed
by him.
The taskforce's report was
comprehensive. While the furious
and mostly political debate
that followed the report
did not earn any mileage for
the BJP in the elections, it did
rekindle the existing debate
on a subject that has been
part of the Indian middleclass
psyche for as long as one
can remember. Public perceptions
have remained
strong of domestic money being
stashed away illegally in
Switzerland and a number of
other countries that have
strict banking secrecy laws.
Among the alleged perpetrators
are politicians, bureaucrats,
criminals as well as
businessmen engaged in mispricing
of goods and services
involved in otherwise genuine
trade transactions.
Huge sums involved
The subject remains fuzzy
with fantastic guesstimates
put out on the amount of
money kept with banks in
overseas tax havens. Recently,
R. Vaidyanathan, a professor
of finance at the
IIM-Bangalore, who has been
researching the subject,
claimed that billions of dollars
of deposits belonging to
India remain unclaimed with
Swiss banks because their
original depositors might
have died without leaving a
will or even a clue as to the
existence of such depositors.
There is a possibility that
these sums can never be repatriated
to India as banks
have their own rules for dealing
with deposits that are unclaimed
for long. According to
Dr. Vaidyanathan, the problem
of salting away the money
abroad is all pervasive
today. Swiss banking has become
synonymous with secrecy
but there are many
other banking centres around
the world which actively encourage
offshore banking and
have strict secrecy laws. According
to the Organisation
for Economic Co-operation
and Development (OECD),
there are currently 20 odd
such centres that lure overseas
investors to deposit
money by promising, among
others, a high degree of banking
secrecy.
The G-20 (The Group of
Twenty) countries recently
agreed that these centres
must be forced to share information
and adopt internationally
acceptable codes of
conduct. The idea is not to
impede tax and criminal investigations
under the pretext
of secret banking laws.
But relying on tax havens to
pull down the veil of secrecy
has had mixed results. Some
countries have co-operated to
a greater degree than others.
Recent reports indicate that
some leading countries would
go slow with their efforts to
`name and shame' off-shore
centres whose governments
do not co-operate.
India's initiatives
India has done well to initiate
a dialogue with Swiss authorities.
The Finance
Minister has said that every
effort will be made to bring
back the money deposited illegally
abroad. But there are
practical difficulties.
One, the size of the alleged
money transfers. Estimates
have varied between Rs. 30
lakh crore and Rs. 70 lakh
crore. According to Dr. Vaidyanathan,
over the 60 years
since Independence, the
country could have lost as
much as $1.5 trillion. The
wide range of figures quoted
is an indication of how difficult
the task is going to be.
Two, even granting that
funds from India would have
found a safe haven in Switzerland
and other places, it is
not clear whether all of them
are the outcome of illegal
transactions. For instance, of
the several account holders in
tax havens, there will be a significant
number of non-resident
Indians who may not
even be assessees under Indian
tax laws.
Three, contrary to the hype
generated, it is not as though
all banking transactions in
tax havens are tainted. In fact,
Switzerland has a high banking
tradition going back to
several decades. Most offshore
centres too have strict
bank licensing laws. This ensures
that only branches of
leading banks are opened
there. Many offshore centres
are actively promoted by
their national governments.
Besides, it is not an offence in
many countries for off-shore
banks to canvas deposits from
residents. Until fairly recently
secrecy in banking was a
virtue. Today even outside
tax havens the business of
banking is conducted with secrecy.
Four, tax avoidance by
individuals and companies
might be the single important
factor driving business to
those centres. In India, for
more than four decades after
Independence, personal tax
rates used to be high. There
was also scarcity of foreign
exchange. It was rationed.
Many individuals who managed
to keep money abroad
not only avoided taxes but also
had ready access to foreign
exchange.
High taxes to blame
Five, if tax avoidance is the
reason for the flight of funds,
it will be difficult for the Indian
government to lay its
hands on the entire deposits
of Indians in tax havens. If
indeed the Swiss authorities
lift the veil of secrecy and give
Indian tax authorities account
particulars of Indians,
the government cannot confiscate
the entire money any
more than it can in a similar
domestic situation. There
will sure be fines and punishments
for transgressing Indian
foreign exchange laws.
But a sweeping assertion that
all the money kept by Indians
abroad belongs to India is
unwarranted.
Six, there is money laundering
by the narcotics trade
and terrorists and is obviously
more serious. It does merit
a crackdown using all possible
measures.
C. R. L. NARASIMHAN
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