Yet some of the lamentation that has driven this uprising is based on what scholars say are “myths” purveyed in the Indian media over the issue of black money.
Much has been debated about Swiss bank accounts, but a new expose by an international group of journalists has thrown light on how the well-oiled mechanisms of tax havens are used to stash away wealth, particularly by 612 Indians.
According to a report in The Indian Express, there are 612 Indians on the list of those who have accounts and funds in corporate entities in the tax havens. The list includes many businessmen who may have stashed funds away in violation of existing banking and forex laws in India.
A preliminary list of names published in the report include the following: Congress Lok Sabha MP Vivekanand Gaddam from Andhra Pradesh, Rajya Sabha MP and UB Group Chairman Vijay Mallaya, Vice Chairman of the Essar Group Ravikant Ruia, Executive Director of KK Modi Group Samir Modi, Dabur group’s Chetan Burman, Abhey Kumar Osawl, MD of Oswal Spinning and Weaving, Director of MRF Rahul Mammen Mappillai, Satyam founder Ramalinga Raju‘s son Teja Raju and Vice Chairman of Indiabulls Group Saurabh Mittal.
Merely being on the list does not, of course, mean the people named may have done something illegal. But a judgment on this will have to wait till further details are unveiled. But it is worth pointing out that some of the people named are non-resident Indians, and they may well be within their rights to hold accounts in any tax-haven they please. They will only have to be in compliance with the laws of the countries they reside in.
The list compiled by the International Consortium of Investigative Journalists (ICIJ), an independent cross-border network of reporters who work on investigative journalism, was culled from data that runs into 2.5 million secret files of over 260 gigabytes. The group worked with media groups across the world to analyse the data.
The ICIJ, during their work also focussed on the role of two offshore firms, Portcullis TrustNet in Singapore and Commonwealth Trust Limited (CTL) in the British Virgin Islands, which the group claims have “helped tens of thousands of people set up offshore companies and trusts and hard-to-trace bank accounts.”
The ICIJ has found that Swiss banks that had tied with the Singapore firm, that claims to be a ‘one-stop shop’ for people looking to stash away funds in tax havens. According to the group, the funds are often used for buying luxury items like mansions, yachts and art and getting tax breaks as well.
Indian regulations, while allowing Indians to remit upto $200,000 annually abroad, don’t permit stashing away of funds in a known tax haven. In the cases of the Indians on the list, they have reportedly chosen either to directly create companies in the tax havens abroad or acquire a majority stake in the companies created in the tax havens, both of which are frowned on by Indian regulators, says the Indian Express.
The others, while not listed in today’s report, reportedly include “the mega-rich and tax offenders”. However, in this case the names of those not published may be more interesting than those the nine that made it to print today.
Dev Kar, lead economist at the Global Financial Integrity (GFI), a policy advocacy group working to curtail cross-border flow of illegal money, reasons that for policy discussions to be sharply focussed on curtailing the generation and transmission of illicit capital, these myths should be dispelled.
“We find media reports floated by some academics that Indian nationals hold around $1.4 trillion in illicit external assets to be wildly exagerrated,” notes Kar. The back-of-the-envelope method used to derive the $1.4 trillion figure is deeply flawed, he adds.
That figure was arrived at by extrapolating GFI’s estimated average illicit outflows over the period 2002-06 — which was $22.7 billion per year — and multiplying it by 61 (for the number of years from independence to 2008).
It is erroneous, reasons Kar, to apply annual averages to a long-time series particularly when illicit flows fluctuate sharply from year to year. Indicatively, India’s GDP from 1950 to 55 was slightly less than $22 billion a year, which would imply that more than 100% of GDP was transferred out as black money during that period, which is an “absurd proposition”.
China fares worse
Whatever the figure, there’s no denying, of course, that India is being bled dry by black money outflows. Yet, bad as it is, particularly for a middling developing country, India doesn’t figure in even the top 10 countries within Asia in terms of “illicit outflows”. China is grappling with a far worse problem on this score — even after accounting for the fact that its economy is thrice as large as India’s.
GFI reported earlier this year that Asia accounts for the largest outflow of “illicit outflows” from developing countries. And within Asia, China is far and away the country with the highest illicit outflow.
How Big Business drives black money
More strikingly, black money isn’t generated only from political bribery and kickbacks. It is generated on a rather bigger scale when Big Business, which operates across countries, dodges taxes and transfers profits to low-tax jurisdictions.
GFI defines “illicit flows” as capital that is “illegally earned, transferred, or utilised” — which covers all unrecorded private financial outflows that drive the accumulation of foreign assets by residents in contravention of applicable capital controls and regulatory frameworks.
In other words, illicit flows may involve capital that is earned through legitimate means such as the profits of a legitimate business. What makes the outflows illicit, GFI notes, is the transfer abroad of that profit in violation of applicable laws (such as non-payment of applicable corporate taxes or breaking of exchange control regulations).
Indicatively, China, on top of the list, witnessed illicit outflows of $2.18 trillion between 2000 and 2008; India, ranked 15th, saw cumulative illicit outflows of $104 billion.
India’s rank on this black list actually fell from 5th place (in an earlier report from GFI). But that didn’t happen as a result of anything that India did right. India’s relative ranking fell largely because illicit outflows from a few oil-producing countries – in West Asia, Latin America and Asia – surged during this period.
The top 10 countries ranked on cumulative illicit outflows from 2000 to 2008 accounted for 70% of all such outflows from all developing countries during that period.
The role of “trade mispricing”
More than half of the illicit outflows from developing countries during that period were accounted for by “trade mispricing” or “transfer pricing”, which happens when corporations operating across borders shift profits to jurisdictions where they are taxed at a lower rate (and by shifting costs into high-tax countries), thereby depriving developing country governments of tax revenue on operations on their territory.
Earlier this month, the International Monetary Fund outlined the modus operandi of this tax dodge measure:
“A company can avoid taxes by establishing an offshoot in a low-tax jurisdiction such as an offshore financial center and having the entity engage in transactions with headquarters. This can shift corporate income—which is usually taxable—into the low-tax jurisdiction.
Tax evaders use tax havens in three ways:
- Hiding income: Receiving income in cash or another non-traceable form, and depositing it in an account in a tax haven (or having the payer deposit the money directly into an offshore account), without declaring the income in the home country.
- Hiding investment income: Depositing legal money in an offshore account but not declaring the interest or other investment income that is derived from it.
- Shifting taxable income: Setting up a company in a tax haven and making payments to this company for nonexistent services or purchases whose price is exaggerated—known as aggressive transfer pricing—to shift taxable income to the tax haven.”
This aggressive “transfer pricing” has led to some bizarre trade prices, which are manifestly intended for tax dodging. Toilet tissue from China was once priced at $4,121 per kg (page 68 of this report), briefs and panties from Hungary were priced at $739 a dozen, plastic buckets from the Czech Republic were priced at $972, and ball-point pens from Trinidad at $8,500 apiece!
Black money is ‘national asset’
One of Baba Ramdev’s demands, as part of his anti-corruption crusade, was that the government should declare all black money held overseas as “national asset” and seize them. But Kar of GFI notes that such attempts to “confiscate illicit funds through a unilateral declaration of ownership will fall flat because as far as owners of illicit capital are concerned, the government declaration does not bring about a material change in their situation.”
The funds continue to be illicit as before and owners continue to have access to their illicit funds outside the country in full cooperation of secrecy jurisdictions without any knowledge of the Indian authorities.
If matters were so simple, reasons Kar, such unilateral declarations by governments would have ensured that there were no illicit funds left in the world.
Black money: India ranked 8 among 150 countries
India is among the top 10 developing countries in the world with a black money outflow of $1.6 billion ( Rs. 8,720 crore) in 2010, a report by Global Financial Integrity (GFI) said. The report, to be released on Tuesday, said the total outflow of black money from India since independence until 2010 was $232 billion, generally in the form of corruption, bribery and kickbacks. The cumulative value of illicit assets held by Indians during the same period is estimated to be $487 billion.
In the post-reform period of 1991-2008, deregulation and liberalisation accelerated the outflow of illicit money from the Indian economy, the report by Washington-based GFI, Illicit Financial Flows from Developing Countries, said.
“Almost three-quarters of the illicit assets comprising India’s underground economy — which has been estimated to account for 50% of India’s GDP (around $640 billion in 2008) — ends up outside of the country,” the report’s author and former economist with IMF Dev Kar, said.
The earlier edition of the report has been quoted by the government in its white paper on black money.
The report found illicit financial flow in 2010 from these countries was $858.8 billion, just below the all-time high of $871.3 billion in 2008.
Maximum outflow of illicit money was from China with India ranked eighth.
The report said that astronomical sums of dirty money continue to flow out of the developing world and into offshore tax havens and developed country banks, meaning that the poor in source countries are being deprived of their right to development.
There is a statistical correlation between larger volumes of illicit flows and deteriorating income distribution in the developing countries, the report said.
The finding that only 27.8% of India's illicit assets are held domestically supports the argument that the desire to amass wealth illegally without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital.
Opportunities for trade mispricing grew and expansion of the global shadow financial system - particularly island tax havens - accommodated the increased outflow of India's illicit capital flight, the report said.
The government has, however, claimed that it has taken several steps including signing treaties with foreign countries to know about Indian black money stashed in foreign banks.
It also claimed that the Income Tax department had initiated action against persons regarding whom information has been received from these countries.
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