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Political Economy

How Successful Was Modi’s War on Black Money Stashed Abroad?

Now nearing the end of his term, the prime minister has not told the country how much foreign black money he has managed to unearth.

Before the 2014 elections, Narendra Modi and senior leaders of the Bharatiya Janata Party flayed the incumbent Congress for its lax attitude toward black money overseas.

In one of the most ambitious campaign promises ever made, Modi said he would bring back enough foreign black money to put Rs 15 lakh in every Indian’s bank account.

Now nearing the end of his term, Prime Minister Modi has not told the country how much foreign black money he has managed to unearth. Finance minister Arun Jaitley recently underlined the NDA-II’s attempts to curb tax evasion abroad. But he neglected to put out hard data that would indicate either success or failure.

Now and then we see an insulated statistic that just raises more questions. But without data on penalties imposed, prosecutions launched, or money recovered from foreign tax havens, it looks like prime minister’s lofty promises have run into a wall.

But what made it so difficult?

Catching without fishing 

Most problems stem from the current international tax cooperation framework. The Central Board of Direct Taxes (CBDT), responsible for implementing and collecting income tax in the country, knows this well.

There are two ways for the CBDT to request foreign tax jurisdictions for information pertaining to Indian taxpayers.

Also read: Looking for Hidden Black Money? London Might be the Place to Start

The first is by invoking the exchange of tax information clause in India’s tax treaties with foreign nations. A tax treaty allocates taxing rights between two sovereign countries, with the primary aim of avoiding double taxation. Most of India’s tax treaties contain provisions to request tax information so as to prosecute evaders.

Recently, the government strengthened treaty provisions relating to exchange of tax information – still, any information requested has to be “foreseeably relevant” for giving effect to the tax treaty or the Income Tax Act.

A blind or fishing expedition is thus not permitted. In the absence of specific “incriminating” details, the tax treaty provision is hard to set in motion in the first place.

Automatic sharing is caring

Additionally, foreign tax administrations (including from developed countries) find all sorts of reasons to ignore, delay, or deny requests. In the rare cases where information is indeed shared, it is often vague, misleading or incomplete.

And in the absence of extensive, worldwide information-sharing network, wealth is not repatriated to India where it belongs, but shifted to new, non-collaborating secrecy jurisdictions.

To avoid the shortcomings of the exchange of information upon request, the OECD developed a Common Reporting Standard (CRS) for the automatic exchange of information regarding bank accounts on a global level. India was an early adopter of the CRS and is committed to exchange information automatically.

Yet the CRS comes with many limitations, most importantly that information is shared with the country in which the bank account holder is a tax resident. For instance, banks in Switzerland would prepare a list comprising the name, bank balance and the country of tax residence of the account holders. That list would be submitted to the Swiss tax officials, who then would exchange the details with the countries in which the account holders are tax residents.

But given how easy it is to obtain a tax-residency certificate in secrecy jurisdictions, the information never has to reach India. Instead, it is given to the country in which the account holder has undertaken to be tax-resident.

Filing for fat cats

Finally, it is convenient and easy for high net-worth individuals and companies to shift their accounts to the US, which has opted out of the CRS. While India does have an Inter-Governmental Agreement with the US under the Foreign Account Tax Compliance Act, the US tax authority is not empowered to reciprocate information sharing.

Also read: Demonetisation Has Failed to Tackle Black Money

Most of the steps taken by this government were in response to the OECD’s Base Erosion and Profit Shifting (BEPS) project – a fifteen-point action plan launched in 2013 to plug loopholes that multinationals have long exploited to shift profits and reduce or eliminate their tax burden.

However, tax avoidance shouldn’t be confused with tax evasion and black money.

In May 2016, for instance, the government signed amended Article 13 of the India-Mauritius tax treaty, withdrawing the controversial capital gains tax exemption.

Many companies did use the Mauritius route to get a capital gains exemption, but that was a question of treaty-shopping and not black money (unless it involved “round-tripping” funds). The inappropriate use of tax treaties is tackled through anti-abuse rules, as by incorporating a principal purpose test or a limitation of benefits clause in tax treaties. A general anti-avoidance rule already exists under the Income Tax Act.

Plugging one loophole often prompts tax avoiders to jump to another: The Netherlands for instance has become the new ‘Mauritius Route’ into India.

Other recent changes to the Indian corporate and international tax regime – such as the new country-by-country reporting requirement for large MNCs, and new interest deductions rules – were inspired from the BEPS project. They address corporate tax avoidance, not black money.

According to latest official annual data from the Swiss National Bank (SNB), Indian deposits in Swiss bank accounts went up by 50% in 2017, reversing a three-year downward trend between 2014 and 2016. While this has been refuted by the Modi government, it’s clear there have been no radical efforts to deter Indians from stashing their wealth in Swiss banks.

India loses hundreds of billions of dollars every year to tax evasion. This money could be used to dramatically reduce poverty and inequality.

It’s clear that the promise of Rs 15 lakh was an electoral gimmick. That’s fine, but before the next election, the Modi government owes it to the people to come clean on how that promise has played out.