India: Black Money and Tax Havens


After nearly two decades of coalition governments, a single-party rule now exists in Delhi. The center-right Bharatiya Janata Party (BJP) won India’s recent election, and Narendra Modi is the new prime minister. One of the BJP’s major poll planks was that it would bring back Indian money that has been illegally held in tax havens abroad, and also curb domestic black money.

Domestic black money, which is estimated to be six to eight percent of India’s GDP (or nearly US$1.9 trillion in 2013), exists mainly due to government corruption and the prevalence of large-scale cash transactions as opposed to the use of proper banking channels. Domestic black money is presumably invested in real estate, construction, and the service sector, which constitute two-thirds of the economy.

In the case of illicit wealth held in foreign tax havens, the story is complex. In the 1960s and 1970s, the marginal rate of taxation was rather large – sometimes as high as 90 percent – so the tendency was to keep money abroad, particularly by trade mispricing.

Global Financial Integrity estimates that between 2002 and 2011, nearly US$344 billion of illicit money moved from India to various tax havens. The Associated Chamber of Commerce and Industry of India estimates that nearly US$2 trillion of black money from India is currently stashed abroad.

As early as February 2008, German authorities began collecting information about illegal money kept by citizens of various countries in the Liechtenstein bank. Germany’s intelligence agency seems to have paid an unnamed informer more than US$6 million for confidential data about clients of LGT Group, a bank owned by the Prince of Liechtenstein Foundation. It had a list of 1,400 clients, only 600 of whom were German.

In March 2008, the German finance minister offered to provide the names – at no charge – to any government interested in the list. Finland, Sweden, and Norway obtained the data. India’s government, however, did not respond immediately. It was only after a lot of public pressure that the Indian government wrote to the German government and received nearly 100 Indian names. It has not revealed the names in India.

India also received information from the French government about Indian citizens who held illegal accounts at HSBC in Geneva. This data was stolen, so Swiss authorities are reluctant to deal with the issue.

In recent years, there has been a spate of Public Interest Litigation cases on the issue of tax havens. The Supreme Court has said that black money stashed away overseas is “pure and simple theft of national money.”

In compliance with the Supreme Court’s directives, India’s new government has constituted a Special Investigation Team (SIT) headed by a retired judge to probe the whole matter and establish methods to bring the money – as well as gold, diamonds, pearls, and other valuables that Indians have kept in the bank lockers of many tax havens – back to India.

India is a member of the Financial Action Task Force and the G20. It has entered into double taxation agreements with many jurisdictions. There is a general perception, however, that since many political leaders and business tycoons may have illicit wealth abroad, there is no political will to deal with this issue.

The constitution of the Special Investigation Team is a major step forward, and expectations are high. India is a large market. It should not be difficult – given the right amount of political will – for it to get back the money that has been stashed abroad by using its market and investment leverage and some amount of arm-twisting.

The global atmosphere is favorable, with the United States and the European Union leading in the pursuit of illicit wealth in tax havens. The returns from investments are also attractive in India due to high expectations for both stock and bond markets. There is already talk of money coming back through foreign institutional investments, where there is a lack of transparency about the origin of funds.

The question is this: Does India have the political will to get back what belongs to its poor citizens and punish the wrongdoers? If it succeeds, it may have a cascading impact for all emerging markets.






 – written by R. Vaidyanathan, provided to BBJ by The Mark News

R. Vaidyanathan is a professor of finance at the Indian Institute of Management Bangalore. The views expressed here are his own.

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