The recent protocol amending the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland has probably raised expectations in certain quarters as to the imminent availability of details of Swiss bank accounts allegedly opened by Indians to evade taxes or for any other purpose not quite legal in India.
The Finance Minister has clarified that the protocol, while improving upon certain key provisions of the agreement, will not be binding on past transactions. The revised pact seeks to bring exchange of information between the two countries — now confined to taxation matters only — on a par with international standards.
Even this limited enhancement of the protocol is seen as a major step forward by experts in the field. But to those who are convinced that astronomical sums are hidden in Swiss accounts, which the government of the day is loathe to identify, leave alone lay its hands on, the official clarification would be seen as another one in a long line of explanations that justify the government's inability or inaction. The term Swiss account has become generic for bank accounts in 70-odd financial centres around the world, which like Switzerland promise a high degree of banking secrecy.
The issue of ‘recovering' money allegedly stashed away by Indians in secret Swiss bank accounts has fascinated several generations of people. Governments of the day, whatever be their political hues, have been defensive. There are strong grounds to believe that large sums of money have been deposited in these secret accounts and the trend is continuing.
That is so despite the fact that tax payers in India pay lower taxes than they did a generation ago. Exchange control regulations have been substantially liberalised. For all practical purposes, India's current account is free while capital transfers of high denominations (up to $200,000) are allowed.
Flight of deposits
Several countries — India might be in the big league but there are certainly other countries which face a flight of deposits to tax havens —are hobbled by the fact that in Switzerland and other countries, which act as tax havens, bank secrecy is guaranteed by law.
A bank manager can go to jail for breaching confidentiality rules.
For banks in these countries maintenance of secrecy has been their unique selling proposition. It is an attribute for which depositors are willing to receive lower interest. However, it is not the secrecy alone that is the only positive factor in favour of investing in these tax havens. Switzerland has an extremely strong tradition of political and economic stability.
Many other tax havens such as Bermuda, Bahamas and Cayman Islands too have strong connections — political and economic — with one or the other rich country.
Tax avoidance at home may still be the strongest motive for individuals and corporations to open and operate these accounts.
In treaties such the one India has with Switzerland concerns over tax avoidance at home are paramount. Not only in India but in several other countries tax evasion poses a major threat to their public finance.
More recently, money laundering, as a conduit for narcotics and terrorism, has occupied the centrestage. At all international forums such as the G20, member countries pledged to bring pressure on the tax havens to become more transparent. International codes of conduct have been devised specifically to counter some of the pernicious practices of the tax havens.
Yet, even with substantial political resolve, it will be a herculean task for countries like India to get the information they want. In fact, there can be, in many instances, an asymmetry of views. Money that has been deposited in tax havens might have escaped the tax net in India but accepting such money need not necessarily be an illegal activity in those countries. Besides, the Indian diaspora is large and it is certain that a large number of non-resident Indians do not come under the Indian tax law or other jurisdiction.
One major practical difficulty has been in estimating the amount of money lying in tax havens over which India probably has a claim. Estimates have varied wildly — between 30 lakh crore and 70 lakh crore — according to one study released last year. The methodology of arriving at such figures is not clear.
Obviously, there can be no official data pertaining to a matter like secret bank accounts.
The experience of the U.S. government in unearthing details of bank accounts of alleged tax evaders is worth noting. Last year, after a long and protracted legal battle, Switzerland's second largest bank UBS agreed to deliver details of 4,450 American account holders suspected by the American authorities of tax violation. In return, the U.S. Government agreed to withdraw the suit against the bank and stopped demanding the names of 52,000 Americans accused of hiding in offshore accounts.
It is clear that the U.S., a country with greater financial clout than India, has been able to secure only that much and that too after some hard legal work. India cannot go on a ‘fishing expedition' and should present its case on the basis of firm evidence and not just suspicions.
