by Vivek Kaul
Hence, every time the oil-marketing companies sell kerosene and cooking gas, they suffer an under-recovery. The government then pays the oil-marketing companies for these under-recoveries. Hence, the government subsidy on oil products goes up. This means higher expenditure for the government. Furthermore, it means a higher fiscal deficit as well. Fiscal deficit is the difference between what a government earns and what it spends.
A higher fiscal deficit means higher borrowing to meet the expenditure. And higher government borrowing ultimately leads to higher interest rates. A situation like this played out in 2013-2014. Of course, not all of it could be attributed to Indians with black money buying gold. Lastly, money that ends up in gold is essentially dead capital.
Interestingly, the law of the land is so structured that it is not very difficult to divert black money into gold. Until December 2015, a PAN (Permanent Account Number) card was mandatory for the purchase of gold worth only above Rs. 5 lakh. In January 2016, this limit was lowered to Rs. 2 lakh. This led to jewellers across the country going on strike. The logic offered by one jeweller was: “In our opinion, more than 80 per cent of the population doesn’t have PAN cards.” And what was the point in coming up with a legislation that impacted a large part of the population, he further asked.578
This is actually no logic at all. If a person can buy gold worth Rs. 2 lakh or more, he can surely get himself a PAN card. Now compare this with investing in a mutual fund, where a PAN card is mandatory, unless an investor is investing less than Rs. 50,000 in a year. This does not mean that no identification proof needs to be submitted. If the individual does not submit a copy of his PAN card, he needs to offer a copy of his Voter ID card, or driver’s licence, or passport, etc. as a proof of his identity. All this is not required when you are buying gold.
Getting back to the issue of tax evasion, for every rupee, dollar or pound that is not paid as tax in its country and yet makes its way to tax havens, or even stays within the country, the government of that country earns lower taxes to that extent. If the government wants to maintain its level of expenditure, it has few options. One is to raise taxes to earn that extra revenue necessary to maintain expenditure. This means that those paying their taxes honestly would get taxed at a higher rate. And that is clearly not a good thing.
Another option in order to maintain the expenditure is to end up running a higher fiscal deficit. Of course, a higher fiscal deficit means that the government has to borrow more. In the process, the government crowds out the private borrowers, because lending to the government is deemed to be the safest form of lending in most financial markets.
There is only so much money going around to borrow from. With the government borrowing more, the private borrowers (like banks and other financial firms) have to offer a higher rate of interest to be able to borrow. This pushes up interest rates all through the economy. In fact, it also leads to financial repression, wherein the government forces banks, provident funds, pension funds and other financial institutions to compulsorily buy government bonds. Government bonds are essentially bonds sold by a government to raise money in order to finance its fiscal deficit.
This financial repression essentially helps the government maintain a lower rate of interest for its borrowing. This is particularly true for India and was pointed out by the Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework (better known as the Urjit Patel Committee), released in January 2014: “Large government market borrowing has been supported by regulatory prescriptions under which most financial institutions in India, including banks, are statutorily required to invest a certain portion of their specified liabilities in government securities and/or maintain a statutory liquidity ratio (SLR).”
This statutory requirement essentially ensures that there is a constant demand for government bonds. This helps the government get away by offering a lower rate of interest on its bonds. “The SLR prescription provides a captive [emphasis original] market for government securities and helps to artificially suppress the cost of borrowing for the Government, dampening the transmission of interest rate changes across the term structure,” the Expert Committee report pointed out.
The Committee uses the word ‘captive’ primarily because banks are forced to invest a certain proportion of their deposits in government bonds. This money then finances the fiscal deficit of the government.
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The popular view is that Switzerland is the centre of global black money. While this is true, the situation is a little more complicated than that. The conventional view of Switzerland is best explained by a line from Orson Welles’ film The Third Man: “In Italy, for 30 years under the Borgias, they had warfare, terror, murder and bloodshed; but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland they had brotherly love; they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.”
But there is a lot more to Switzerland than just global black money. As the Cambridge University economist Ha-Joon Chang writes in Bad Samaritans—The Guilty Secrets of Rich Nations and the Threat to Global Prosperity: “Switzerland is not [emphasis original] a country living off black money deposited in its secretive banks and gullible tourists buying tacky souvenirs like cow bells and cuckoo clocks. It is, in fact, literally the most industrialised country in the world.”579
Data released by the Swiss National Bank suggests that the Indian money in Swiss banks was at around Rs. 14,000 crore in 2013. In 2006, the total amount had stood at Rs. 41,000 crore. The reason for this fall is simple. Over the past few years, as black money and Switzerland have come into focus, it would have been stupid for individuals or companies sending black money out of India to keep sending it to Switzerland.
What further needs to be realised is that there are around 70 tax havens all around the world. An estimate made by Philip R Lane and Gian Maria Milesi-Ferretti in a 2010 International Monetary Fund working paper suggests that over $18 trillion of wealth lies in small international financial centres other than Switzerland and beyond the reach of any tax authorities. Even this is “most likely an underestimate, in light of the severe data problems”, the authors feel.580
An estimate made by The Economist in 2013 suggested that: “Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion.”581
Getting back to India, a question worth asking is: Just how much black money has left Indian shores? An estimate made by the Washington-based research and advocacy group Global Financial Integrity in reports published in December 2014 and December 2015 suggests that the total amount of black money that had left India between 2003 and 2013 stood at $520.5 billion (see Table 9.6). Of course, this is much more than the Swiss claim to have.
Also, this estimate does not take into account hawala transactions and the misinvoicing of trade. As the report points out: “Many illicit transactions occur in cash to prevent an incriminating paper trail. For these many reasons, our estimates are likely very conservative.”582 Even with these weaknesses, there is no denying that a substantial amount of money seems to have escaped Indian shores between 2003 and 2013. And there is no reason to suggest that this process wouldn’t have continued in the years that followed.
The outflow peaked in 2012, when it reached $92.9 billion. In 2013, the number had stood at $83 billion, which was around 9.7 per cent lower than the previous year.
Table 9.6: Black money leaving India between 2003 and 2013.
Year Amount
(in $ billion)
2003 10.2
2004 19.5
2005 20.3
2006 27.8
2007 34.5
2008 47.2
2009 29.2
2010 70.3
2011 85.6
2012 92.9
2013 83
Total 520.5
Source: Global Financial Integrity.
The interesting thing, nonetheless, is that the quantum of money leaving India h
ad increased dramatically during the Congress-led United Progressive Alliance (UPA) years. In 2003, around $10.2 billion left the country. This almost doubled by the next year. By 2012, it had jumped, by around 9 times, to $92.9 billion. In 2013, it was a little lower, at $83 billion.
Interestingly, the figure in 2009 was at $29.2 billion. This clearly tells us that the second term of the Congress-led UPA government, which started in May 2009, was fairly corrupt, leading to a lot of black money leaving Indian shores.
India is not the only country facing this problem. In fact, when it comes to the total amount of black money leaving a country, India is fourth in the list, behind China, the Russian Federation and Mexico. On this front, India has rapidly caught up with Mexico over the years. The outflow of black money from Mexico between 2004 and 2013 had stood at $528.4 billion, just a little more than that from India.
Also, the amount of money leaving China in 2013 was 3.2 times in comparison to 2004. In the case of the Russian Federation, in 2013, the amount of money leaving was 2.6 times, whereas in the case of Mexico, it was 2.3 times. Between 2004 and 2013, the jump in the Indian case was around 4.3 times, which was clearly the most.
This money has found its way into tax havens all across the world, including Switzerland. As Gabriel Zucman writes in The Hidden Wealth of Nations—The Scourge of Tax Havens: “There has, in fact, never been as much wealth in tax havens as today. On a global scale, 8 per cent of the financial wealth of households is held in tax havens. According to the latest available information, in the spring of 2015, foreign wealth held in Switzerland reached $2.3 trillion.”583
The money held in Swiss banks is almost equal to India’s GDP. In fact, since April 2009, the money held in Swiss banks has increased by 18 per cent. The increase across all tax havens all over the world has been 25 per cent.
Interestingly, the Swiss have been smart about the black money coming into Switzerland. With all this money coming into Switzerland, the Swiss franc should have appreciated against other currencies. An appreciation of the Swiss franc would have hurt the overall Swiss economy, given that it is dependent on exports. An appreciating currency makes exports non-competitive against exports from countries whose currencies are not appreciating.
In order to avoid getting into such a scenario, the Swiss central bank, several times in the 1970s, imposed negative nominal interest rates on deposits in Swiss francs held by non-residents. This basically meant that the depositors had to pay the bank to keep their money. The message was clear: We are fine with things, as long as you hold non-Swiss assets.584 But the moment you want to hold money in our currency, you will have to pay us for doing so. This essentially ensured that the Swiss franc did not appreciate, as all the black money coming into Switzerland over the years came in currencies other than the Swiss franc. Hence, Swiss exports continued to remain viable.
In September 2015, the United Nations set out the Sustainable Development Goals. Goal 16.4 points out that countries will “by 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organised crime”.
The phrase ‘illicit financial flows’ essentially refers to what we call black money in India. The Modi government has also on and off talked about getting back the black money that has left India.
In the run-up to the 2014 Lok Sabha elections, Narendra Modi had been very vocal about getting the black money that had escaped Indian shores back to India. This focus continued even after he took over as Prime Minister of the country on 26 May 2014. Though, two years later, there is little or nothing to show for any effort that may have been put in to get this black money back, despite a lot of noise being made.
The question to ask is: How feasible is this?
Given that a large amount of black money has left India, the Modi government’s interest in getting this money back seems justified. While things may always be possible, what we need to look at is whether they are probable (or should I say feasible?).
One argument made against trying to get the black money back has been that there are way too many tax havens all around the world. There are around 70 tax havens all over the world, and the black money that has left the shores of this country could be stashed away almost anywhere.
Zucman estimates that around 8 per cent of the global financial wealth, or $7.6 trillion, is held in tax havens. His estimate is significantly lower than the other estimates stated earlier. But each of these estimates is a huge number, and that is what matters the most. Also, it is worth mentioning here that Zucman’s estimate does not take into account non-financial wealth in tax havens. Non-financial assets include gold, yachts registered in places like the Cayman Islands, and works of art as well as jewellery.585
Getting back to the point I was discussing: How good are the chances of India and other countries getting this money back? While Switzerland was the original tax haven to which people who did not want to pay tax in their home countries took their money, things have changed since the 1980s. New tax havens, like Singapore, the Bahamas, Luxembourg, Hong Kong, etc., have emerged over the years.
As Zucman writes: “In all these tax havens, private bankers do the same things as in Geneva: they hold stock and bond portfolios for their foreign customers, collect dividends and interest, provide investment advice as well as other services…. And, thanks to the limited forms of cooperation with foreign tax authorities, they all offer the same service that is in high demand: the possibility of not paying any taxes on dividends, interest, capital gains, wealth, or inheritances.”586
As mentioned earlier, the Swiss banks, as of the spring of 2015, had foreign wealth worth $2.3 trillion (of course not all of it was black money). Of this, around $1.3 trillion belonged to Europeans. Given Zucman’s estimate of $7.6 trillion, a lot of black money emanating from all over the world has found its way into tax havens other than Switzerland.
How different are these tax havens from Switzerland? As Zucman writes: “To view Swiss banks in opposition to the new banking centres [i.e., tax havens] in Asia and the Caribbean doesn’t make much sense. A large number of the banks domiciled in Singapore or in the Cayman Islands are nothing but branches of Swiss establishments that have opened there to attract new customers.” Furthermore, this has also happened in order to make the most advantageous use of the tax laws of these places.
And this is one of the well-kept secrets of the various international tax havens—Switzerland is still at the heart of it all. As Zucman writes:587
In the past, Swiss bankers provided all services: carrying out the investment strategy, keeping securities under custody, hiding the true identity of owners by the way of famous numbered accounts. Today, only securities custody really remains in their purview. The rest has been moved offsite to other tax havens—Luxembourg, the Virgin Islands, or Panama—all of which function in symbiosis. This is the great organisation of international wealth management.
Given this, India alone cannot deal with the issue. Combined international pressure needs to be applied on Switzerland in order to get anywhere with the idea of bringing black money that has left the shores of the country back.
Given that there are so many tax havens, the money that has left Indian shores could be anywhere. Tax havens maintain secrecy in order to ensure that they remain attractive options for those who are looking to hide their black money. Hence, recovery will continue to remain difficult.
As Pooja Rangaprasad of the Centre for Budget and Governance Accountability (CBGA) writes in an article titled ‘Issues Related to Black Money’: “Individuals and corporations... set up a layer of benami trusts... using this network of tax havens and loopholes in domestic laws.”588
In fact, more than 60 per cent of the accounts in Switzerland are held “through intermediaries of shell companies headquartered in the British Virgin Islands, or foundations domiciled in Liechtenstein”. As Zucman writes: “Even if Switzerland has lost its hegemony… it’s important to understand tha
t it remains the heart of the machine… because the entire chain starts at its banks.”
Despite this, even with Swiss cooperation, it might not be easy for the government authorities to figure out who the ultimate beneficiary is. And figuring this out would require massive international coordination and cooperation. Hence, the chances of getting back the black money that has left the shores of the country remain low. This point becomes even clearer by the fact that nearly $1.5 trillion of the mutual fund investments domiciled in Luxembourg have no identifiable owners.589
Zucman talks about imposing trade tariffs on Switzerland along with the maintenance of an international financial register. This, he feels, would “deal a fatal blow to financial secrecy”. The irony is that Switzerland does not make much money in the process. Swiss banking services, which help people from all over the world to evade tax, do not contribute much to the GDP. The tax evasion brings in around €15 billion every year, or a little over 3 per cent of the Swiss GDP. Hence, unlike many other tax havens, Switzerland does not survive on all the black money from large parts of the world that is hoarded through its banks. So, even if the Swiss were to stop offering these services, it wouldn’t make a huge difference to their GDP.590
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One school of thought is: If the United States can work towards getting its black money back, then why can’t India? The Indian Act called the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (popularly known as the foreign black money Act) is inspired by the Foreign Account Tax Compliance Act (FATCA) of the United States. This FATCA of the United States was passed in 2010 and was brought in after it was revealed that Swiss banks were helping American citizens hide their earnings.