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Bringing back black money: Narendra Modi's mission impossible?

Rajan Katoch | Updated on: 27 May 2016, 15:50 IST
The numbers
  • Illicit money flow from India averages Rs 3.3 lakh crore per year
  • It is estimated that Rs 80 lakh crore is stashed away abroad
Steps taken
  • Govt has set up an SIT on black money
  • It has streamlined Double Taxation Avoidance Agreements with key countries
More in the story
  • Why tax havens aren\'t going anywhere
  • Why it\'s nearly impossible to bring back money stashed abroad

The whole idea of bringing back black money stashed abroad has caught the popular imagination, following the election campaign of 2014. Narendra Modi in particular raised the issue repeatedly.

Read- Beyond the jumla: how far has Modi succeeded in acting against black money?

The government has taken a number of steps, including setting up of a Special Investigation Team (SIT) on Black Money, enacting the Black Money Act, making more stringent the provisions of the Foreign Exchange Management Act (FEMA) and Prevention of Money Laundering Act (PMLA), opening a compliance window for voluntary disclosures, gearing up the income-tax administration, streamlining Double Taxation Avoidance Agreements with key countries, pushing for the Common Reporting Standards (CRS) with other countries. Yet, the outcomes have not met the expectations of the people. Why is it so?

The magnitude of the problem

To put things in perspective, take a look at the estimates of how much black money from India is stashed abroad. There are no official estimates. The most quoted unofficial estimation is based on an annual exercise done by the international NGO Global Financial Integrity (GFI). Their estimates indicate that illicit financial flows from India have averaged over $51 billion (approx Rs 3.3 lakh crore) every year in the decade from 2004-13. In 2013 alone, these flows were estimated to be $83 billion (approx Rs 5.39 lakh crore). In the 2014 election campaign and thereafter, a figure of Rs 80 lakh crore as the total amount stashed abroad, has been mentioned, and this seems to be broadly consistent with the unofficial estimation of GFI.

Leaks and exposes from private investigations such as the Panama papers have made available information on Indians with overseas financial interests. These are doubtless being investigated. Investigative agencies dealing with tax evasion (Income Tax Department) and proceeds of crime (Enforcement Directorate) have been making efforts for some time at tracking wrongdoers.

Also read: Modi govt's black money amnesty scheme a spectacular flop

However, they have had limited success in getting funds repatriated as a result of investigations and legal actions. For example, ED, over the last few years in select cases, has legally attached laundered assets of Indians in countries like Switzerland, Australia, Singapore, US. But the money has yet to actually come back. Investigative agencies are acutely aware of the limitations in the global legal regimes, but have no option but to plug away nevertheless in the few cases they can get any information on.

A big recent achievement of the government is the voluntary disclosure, stated to be of about Rs. 3,770 crore, made by overseas account holders in the compliance window of 2015. This represents the largest single amount of black money "coming back" in a long time. But to put it in the perspective of the estimated annual outflows, it's less than 1% of the likely illicit financial outflow for that year. It's also a very, very insignificant fraction of all that has allegedly been placed abroad (Rs. 80 lakh crore?) over the years.

Why is black money stashed abroad?

Why is black money, or any money for that matter, "stashed abroad" in the first place? It is because rich individuals across the world, in both richer and poorer countries, want to put their money in safe places where their national governments cannot reach or claim a share in the form of taxes.

It is also because persons involved in illegal activities need safe places to keep the proceeds of crime. So in response to these needs, there exist places where such money or assets can be stashed. These are usually jurisdictions ("tax havens") that have zero tax regimes, relative bank secrecy, easy registration of companies, with no questions asked on the ultimate or beneficial owners of these accounts or companies. A surprisingly large number of these jurisdictions are linked to richer and financially more powerful countries eg the United Kingdom, the United States, Switzerland, Hong Kong etc. This is part of the current global financial order, and has been so for a long time.

At the same time, these countries tend to be concerned about use of these tax havens for laundering of illicit funds, especially related to terrorism. The Financial Action Task Force (FATF) is a Western-dominated multilateral initiative to address these concerns and encourage countries to tighten up their anti-money laundering regimes through a system of blacklisting jurisdictions (such as Iran, North Korea) that do not comply. The blacklisting does not seem to apply, however, to the jurisdictions perceived as tax havens but controlled by the major powers dominating FATF.

The way out

Rich countries also tend to be concerned, just like we are, about their citizens evading national taxes and stashing their funds in other jurisdictions. They too make national efforts to detect such cases and get the funds back. The success of these efforts depends on the international clout of the country concerned. The classic case is that of the US, which globally has the most financial clout. It has successfully been able to lean on Switzerland's UBS and Credit Suisse, levied hefty fines on them, and made them divulge details of American account holders, despite the longstanding Swiss banking secrecy laws. It has unilaterally enacted the Foreign Account Tax Compliance Act (FATCA), which most countries including India have agreed to implement.

This law demands information on US account holders in foreign financial institutions, without any reciprocal obligation on the part of financial institutions in the USA. This is possible because of the disproportionate importance of the US in global finance. Non-US financial institutions just cannot afford to risk being barred or blacklisted by the US for non-compliance.

US has unilaterally enacted a law like FATCA. India doesn't have the clout to do replicate it

Such a route is unfortunately not open to most countries, including India. So the government has rightly worked on multilateral options. India has been active in the G20 in promoting along with the European Union (EU) a FATCA-like Common Reporting Standard (CRS). CRS seeks to provide automatic exchange of account related information between signatory countries, and will come into force from 2017-18. Nearly a hundred countries have signed up, while about a hundred have not.

Read more: How much black money is stashed away in tax havens? The govt doesn't know

CRS is a step forward, no doubt. It adds to other multilateral efforts, like those of the FATF in the field of anti money laundering. Effectiveness of this effort remains open to question. Would these multilateral arrangements be able to alter the global order, and enable India to track down its citizens holding accounts abroad, in a scenario where the global powers that dominate international finance are also those that most benefit from the status quo?

Despite professed international commitment to greater transparency in tax havens and many positive initiatives, the global financial order is unlikely to significantly change to our advantage in a hurry. National capacities are severely limited. Tax havens will not disappear in the foreseeable future. Avenues will continue to remain for the wealthy of the world to easily and anonymously park their funds. Accordingly, no matter how hard we try, it is difficult to imagine a situation in which best efforts to bring back black money of Indian citizens allegedly stashed abroad can in the medium term be anything more than the proverbial drop in the ocean.

Edited by Aditya Menon

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First published: 27 May 2016, 15:50 IST