The UPA government may have gone into overdrive on the black money issue but it has so far failed to use a Swiss tax provision that will allow India to not just estimate how much money its citizens have illegally stashed away in bank accounts in Switzerland but to also earn revenue from them.
The Swiss authorities are unwilling to make these secret accounts public and will only provide foreign governments with details if they can prove an individual account is linked to illegal activity back home. This is an impossibility, since nothing is known about those accounts to begin with. However, Switzerland is prepared to share with foreign governments a portion of the tax levied on the interest that these foreign account holders earn, thereby opening a small window onto a hitherto hidden room.
The European Union was the first to seize this opportunity. Under an agreement between the EU and Switzerland that came into force in 2005, personal savings accounts held by EU nationals in Swiss banks are subject to a retention tax on interest income. Under the agreement, 75 per cent of the revenue so generated is transferred to the respective EU member state governments while the rest is allocated to Switzerland for associated expenditures. Currently, only individual personal accounts are covered, which is seen as a major drawback. The EU is now pressurising Switzerland to extend its provisions to assets other than such bank accounts also.
Though Swiss banks pay a paltry 1.25 per cent on personal savings accounts, the revenue generated through the retention tax is substantial. In 2008, the gross revenue from the retention tax (at 20 per cent, which is to go up to 35 per cent from July 1 this year) on interest income of EU taxpayers in Switzerland amounted to CHF 738.4 million (US$ 865.32 million, at current exchange rates). Out of this, US$ 649 million was transferred to EU member states.
Working back from an average tax rate of 20 per cent and an average interest rate of 1.25 per cent, it would appear that EU nationals have individual accounts in Switzerland worth approximately US$346 billion.
An EU-type agreement with Switzerland would similarly allow India to form the first firm estimate of the amount of money its citizens have illegally deposited in individual accounts there. But so far, the UPA government has not pursued the matter.
In response to Baba Ramdev's campaign, the government has publicised the measures it has taken against black money such as the signing of, and negotiations on, modified and new Double Taxation Avoidance Agreements (DTAAs) with over two dozen governments, including Switzerland, to facilitate exchange of banking information and entering into Tax Information Exchange Agreements with various other jurisdictions or so-called “tax havens” around the world.
However, in its negotiations with Switzerland, what India has given the go-by, perhaps unwittingly, is the provision to collect tax and thereby quantify the amount of black money held by Indians there.
In the Indian context, the revenue foregone can be significant considering that different estimates on the quantum of black money range from US$ 500 billion to $1,400 billion and a recent study by Global Financial Integrity has estimated the illicit money outflow to be $ 462 billion. If even a portion of that is held in Swiss accounts, India may at least have the satisfaction of earning some money from this stash — as a first step towards ensuring its eventual confiscation.
According to Mark Herkenrath of Alliance Sud — a Switzerland-based joint advocacy and lobbying entity of major Swiss development organisation which focuses on tax transparency and international financial markets, the Swiss government has announced several times that it would be willing to examine official requests for such savings tax agreements, in particular if requested by developing and emerging market countries. So far, no country, including India, has acted on this proposal and this is a fact that Swiss officials, speaking on condition of anonymity, have also confirmed to The Hindu.
Mr. Herkenrath said that it is surprising that the Indian government — if aware of this Swiss proposal — has not reacted to it and demanded inking of such an agreement along with the DTAA, particularly when it was one of the very first countries in the world to have asked Switzerland for a revised DTAA to include updated transparency standards and has got the same conditions regarding tax information exchange as European countries have obtained in their revised accords.
More significantly, while the revised DTAA with Switzerland — which is likely to come into effect from early next year after ratification by Swiss Parliament — does not allow any “fishing expedition” and will have no retrospective effect, the savings tax on interest income is leviable on all personal bank accounts in Swiss banks, irrespective of the date of the agreement, as long as the accounts still exist.
The Swiss retention tax mechanism can also indirectly help in segregating the illicit fund accounts from the legal ones. This is for the simple reason that the onus of proving the sanctity of the funds is on the account holder. In the case of EU states, for instance, about 43,000 voluntary declarations were received in 2008 and these represented an interest amount of CHF 820,370,039 (US$ 961,378,153).