India opens new front in tax evasion battle

India is seeking trillions in missing tax revenue AFP

Switzerland has denied preparing a list of tax dodgers for the Indian authorities amid mounting pressure on the alpine state. Even with a global standard on Automatic Information Exchange (AIE) in the works, repatriating money from offshore havens like Switzerland may not be easy.

An investigatory body, recently set up by India’s new government to unearth black money, trumpeted the disputed cooperation to the Times of India: “This is a breakthrough development in the fight against black money. Until now, the impression was that Switzerland is creating hurdles in this battle,” Arijit Pasayat, vice-chairman of the Special Investigations Team (SIT), told the newspaper. 

But an official denial of such a list from the Swiss State Secretariat for International Financial Matters (SIF) hints at a more challenging task ahead for Indian investigators. “Such reports [of lists being prepared] are untrue,” SIF spokesman Mario Tuor told swissinfo.ch. 

SIF added in a later statement that there had been no further developments in the issue since Swiss negotiators met with Indian counterparts in Delhi in February. “Switzerland is committed to resolving any open question with India and trusts that India shares its understanding that any solution can only be found within the established national and international legal frameworks,” the statement read.

The expectations from the new Indian investigations team are high, but so are the challenges it faces. What will this mean for jurisdictions like Switzerland, and to the broader fight against tax evasion globally?

India acts

Soon after Indian Prime Minister Narendra Modi’s came to power in May, the new government constituted the Special Investigations Team (SIT), pursuant to a pending court order.

The Indian Supreme Court had acted on a writ petition filed by former Law Minister Ram Jethmalani, and in July 2011 the court specified the terms of reference for the team. 

The previous Indian government had not complied with the order and had sought a review.

But the new government moved swiftly to implement the order. Modi had repeatedly invoked bringing back black money from foreign banks on his campaign trail.

SIT is tasked with developing a comprehensive action plan that will create institutional structures and investigations into unaccounted assets being stashed in foreign banks by Indians.

SIT comprises two former Supreme Court justices, a deputy governor of the central bank and a gamut of senior bureaucrats from the Department of Revenue, the Intelligence Bureau, Enforcement Directorate, the Central Bureau of Investigation, the Research and Analysis Wing, Revenue Intelligence and the Central Board of Direct Taxes.

Trillions

Various estimates peg the amount of unaccounted Indian money between $2 trillion to $3 trillion (CHF1.8 trillion to CHF 2.7 trillion). Some CHF4.25 billion of Indian assets were parked in Swiss banks last year (down from CHF5.7 billion in 2012), according to the Swiss National Bank, but there is no way of knowing how much of this wealth has been declared. 

It is easy to see why the new Indian government is keen to improve its record of collecting tax, partially by plugging these leaks of wealth abroad. Tax revenues in India represents only around 15% of total economic output – compared to nearly 40% across the European Union. 

Rudolf Elmer, a Swiss banker-turned-whistle-blower, is sceptical that SIT will prove any more successful than the United States in dragging information out of Switzerland.

“The US requested information from about 350 Swiss Banks, but has so far received information on very small number of Americans who hold a Swiss account,” he told swissinfo.ch. “I hope I am wrong but I would be very surprised if the Indian investigation team will be more effective than the American team.” 

Perhaps a more profitable route for India would be to utilise the Organisation for Economic Cooperation and Development’s (OECD) Declaration on Automatic Exchange of Information in Tax Matters, which Switzerland endorsed in May.

The standard obliges countries and jurisdictions to obtain financial account information from their financial institutions and exchange information automatically with other jurisdictions on an annual basis.

Which countries?

On endorsing the declaration, the Swiss government Switzerland said it would start negotiating bilateral tax deals with “selected” countries. “In an initial phase, priority would be given to the introduction of the automatic exchange of information with countries with which there are close economic and political ties…and which are considered to be important and promising in terms of their market potential for Switzerland’s finance industry,” a statement read.

But India should not become fixated with Switzerland, according to observers, but should also negotiate with other jurisdictions.

“I think that Switzerland has become such a talisman for Indian corruption campaigners that one could risk losing sight of the other dirty-money players: notably Britain, Mauritius, Singapore and Hong Kong, Luxembourg, the U.S. and various others,” said Nicholas Shaxson, journalist and author, Treasure Islands: Tax Havens and the Men who Stole the World.

Shaxson, who also writes for Tax Justice Network – a coalition advocating for tax transparency,  believes India must pursue a more coherent, organised effort, taking a global leadership position in the campaign against illicit financial flows.

“I am not sure that the Indian government has been banging the drum for transparency internationally, although it should,” he said. “It does seem odd that a country like India that has been such a victim of looting, capital flight and illicit outflows has not articulated a clear position internationally on this.”

“So many of the countries that are victims of western tax havens are led by people who are involved in those same practices. It is a terribly difficult problem to solve, but India is far from alone.”

Diplomatic dialogue

Opinion is split on how potent a tool the OECD-backed AIE will be once it is up and running on a global scale.

“India may not be a directly beneficiary of the Agreement but it definitely opens up the possibility of diplomatic dialogue by India with various countries to achieve transparency through information exchange,” Girish Vanvari, partner  and co-head of tax at KPMG Mumbai, told swissinfo.ch.

The Swiss position

Mario Tuor, spokesman for the State Secretariat for International Financial Matters, (SIF), clarified that the Swiss government had recently responded to a few requests from India. 

But those requests were not based on stolen data. 

Existing Swiss law neither allows exchange of information based on stolen requests, nor does it yet recognise the automatic exchange of information. 

The Swiss government has not yet decided precisely how it will implement the new AIE standards.

Tuor said is not clear whether India will be a priority AIE partner, although it has deepening economic ties. 

A spokesman for the Swiss Bankers Association (SBA), Jean-Marc Felix, said: “We are in line with the OECD and we are actively participating in establishing an international standard for an automatic exchange of information.” 

“We have always said that as soon as AIE becomes common international practice we will comply.”

Monica Bhatia, head of the Global Forum on Transparency and Exchange of Information for Tax Purposes, is also optimistic. “This is expected have a significant deterrent effect on taxpayers who seek to hide money abroad and will help enforcement efforts of the tax administration,” she said.

The OECD believes the standard will be truly international and be implemented across the globe. It hopes AIE will be helpful to the Indian government in addressing the black money hidden abroad.

However, some critics believe the OECD standard focuses too much on income. Typically tax evaders do not invest their money in assets which generate reportable income such as interest and dividends.

Further assets held in vaults and free ports, real estate and trusts, among others are not covered in the standard. The standard also assumes reciprocity, and has no sanctions for “recalcitrant jurisdictions”. Countries such as Russia, Cyprus, Mauritius, Seychelles, among others have not endorsed the standard.

If AIE does not produce the desired results, India does have other tools at its disposal, according to Mark Herkenrath, head of international finances policy at Bern-based pressure group Alliance Sud.

“If transparency on tax evaders is hard to come by on account of banking secrecy, India must approach countries like Switzerland to get information of account holders via the routes of corruption, money laundering or drug trafficking. Switzerland has strong laws on such issues and has helped countries in the past,” he said.

And experts have suggested a series of urgent measures that India can address domestically such as reducing disincentives against voluntary compliance by rationalizing tax rates and reducing costs of compliance.

“Greater control and monitoring of real estate transactions in the country, insistence on routing through bank account all transactions over certain limits, reforms in vulnerable sectors such as financial services, real estate, natural resources and bullion, will all contribute to cracking down on generation of black money,” Sonu Iyer, Partner, Ernst & Young in New Delhi said.

“If one were to believe the intent communicated by the new government and considering their absolute majority in the Parliament, this would be the most opportune time to address the issues relating to tax transparency,” KPMG’s Vanvari added.