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 middle-class 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.


Going after secret foreign accounts September 9, 2009

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