Banking Secrecy: India’s Predicament

08.03.14

Banking Secrecy: India’s Predicament

08.03.14
Rupee

Black money stashed away in tax havens abroad has remained one of the most destabilizing forces facing developing nations. In fear of losing their reputation as a safe haven for investment, the financial institutions of the countries where these funds finally get routed, refuse to disclose details pertaining to the account holder citing reasons of confidentiality and banking ethics. However, the implication of this denial on the ordinary population of the countries where these black monies have their origin is catastrophic. This should not be seen as an economic or financial phenomenon. Rather, this is blatant violation of the moral rights and dignity of poor tax paying citizens.

The statistics as furnished by Global Financial Integrity, a non-profit research organization specialized in tax havens estimate that Indians have $500 billion of illegal wealth stashed abroad. More startling is the information that about two thirds of this amount has been stashed away after liberalization. Switzerland has been one of the major hubs for the safe deposit of black money from India. The counter measures being adopted by Indian authorities have gained an unprecedented rigor with the new government at the centre. Bringing back this black money has always stood out as a key promise made by the Bharatiya Janata Party.

Immediately after the recent elections, a special investigation team (SIT) was established to investigate the issue of black money stashed away abroad. India’s Supreme Court as far back as 2011 ordered that the issue be investigated. The new government has asked Swiss authorities disclose information pertaining to various Indian nationals holding Swiss bank accounts. Though it was initially said that a list of tax dodgers had been prepared to be handed over, later Swiss authorities refused.

Admittedly, some positive signals have been coming from the Swiss side. Switzerland recently signed the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters, which could allow for the automatic exchange of tax information in some circumstances. Succumbing to global pressure, it was announced that Switzerland would be adopting a key revision in the Switzerland Tax Administrative Assistance Act, which would forgo the need for informing individuals before any data is disclosed.

However getting information from Swiss authorities will not be a cakewalk for India. In fact, the Foreign Banks in Switzerland Association recently told Indian media that India must step up its game to produce credible and watertight requests for information under the terms of existing Swiss-Indian agreements. India has to demonstrate that any information it wants from Switzerland has ‘foreseeable relevance’ to a criminal investigation into tax dodgers in India.

India has incriminating evidence of a so-called HSBC list, which is a record of account holders’ names that became available after Hervé Falciani, a disgruntled HSBC employee, stole data in 2011. Switzerland has so far refused to share names or disclose client information with India under its bank secrecy laws on the basis of the stolen data.

With little response from the Swiss side, the possibility of tackling this issue by way of a one-time amnesty scheme for voluntary disclosure has also been discussed. The government has also clearly expressed its intent to raise this issue in forums like the G20 and the UN Security Council. India has also threatened to declare Switzerland a “non-cooperative jurisdiction.” It has also alleged that Switzerland has not honored the terms of the Double Taxation Avoidance Agreement (DTAA) between the two nations, under which information about Indians with accounts in Swiss banks has been sought by tax authorities.

With a newly elected government at the helm, there is a ray of hope. Whether or not the new government will succeed in bringing back the black money stashed away abroad is something that only time can answer. However, it can be asserted that this issue is one of the biggest impediments that India will have to overcome in its quest to become a developed country in the near future. Waxing eloquently about the steps to be taken will not serve the cause. Rather, stringent action through a series of concerted steps is what is required to resolve this issue.

In a letter to Swiss Finance Minister Eveline Widmer Schlumpf, the Former Finance Minister Chidambaram reminded her of the April 2009 declaration adopted by G20 leaders stating the “era of bank secrecy is over.” Though six years have elapsed since the declaration, the dawn of a new era still has not arrived.

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