When US can't get its black money back, does India have a chance?

There would be more bang for the buck by concentrating on ill-gotten wealth that is still in the country.

 |  5-minute read |   14-05-2015
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Over the week, the Parliament passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015, which until now has been better known as the Foreign Black Money Bill. Now it has become an Act. The 2012 white paper of the ministry of finance on black money defines it as “any income on which the taxes imposed by government or public authorities have not been paid”.

In my past columns on DailyO, I have maintained that while chasing black money that has left the shores of the country might seem possible, it is not feasible. The reason for this is fairly simple. The money could be absolutely anywhere in the world.

In India, we like to believe that the money is stashed away in Swiss banks. But that isn't the case. Data released by the Swiss National Bank, the central bank of Switzerland, suggests that Indian money in Swiss banks was around Rs 14,000 crore in 2013. In 2006, the total amount stood at Rs 41,000 crore.

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 almost anywhere. An estimate made by the International Monetary Fund (IMF) suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland, beyond the reach of any tax authorities. A 2013 estimate in The Economist pointed out: "Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion." Some of this money definitely originated in India.

And given that the black money that has left India could be absolutely anywhere, chasing it isn't the best way of going about things. There would be more bang for the buck by concentrating on black money that is still in the country.

This in short, is the argument I have made against trying to get the black money that has left the Indian shores, back to India. A standard response to this on the social media is that if the US can do it why can't we? So here is the answer.

The Foreign Black Money Act passed by the Parliament this week is inspired by the Foreign Account Tax Compliance Act (FATCA) of the US. This Act was passed in 2010. It was brought in after it was revealed that Swiss banks were helping American citizens hide their earnings.

According to the Act, American taxpayers are required to file a new form (Form 8938) declaring their foreign financial assets with a value greater than $50,000. This form needs to be filled up along with the annual tax return. If the taxpayer does not file Form 8938, he can face a fine of $10,000, which can go up to $50,000 for subsequent offences. Any taxpayer who pays lower tax because he does not disclose foreign financial assets could be subject to a penalty of 40 per cent.

The provisions of the Foreign Black Money Act passed by the Parliament are along similar lines. One of the provisions of the Act allows undisclosed foreign income as well as assets to be taxed at the rate of 30 per cent, without allowing for any exemptions or deductions which are allowed under the Income Tax Act, 1961. This will be accompanied by a penalty equal to three times the amount of tax.

Getting back to FATCA, according to the Act, every financial institution outside the US needs to figure out whether it has American citizens as clients. Having done that, it needs to report the information to the Internal Revenue Service of the United States.

Owing to this, the conventional view now seems to be coming around to the idea that tax havens are now cooperating with the US and handing over information regarding their clients.

Hence, the question is, if the US can do it, why can't India? And the answer lies in the fact that the US is a global superpower. In 2013, the military expenditure of the US amounted to $640 billion. This was nearly 36.5 per cent of the global military expenditure of $1.75 trillion. In comparison, the total budget for the Indian defence services in 2015-2016 is around $2.5 billion.

With so much money being spent by the US, the military apparatus of the country can drop bombs anywhere in the world at a few hours’ notice. As David Graeber writes in Debt: The First 5000 Years, "The US military... maintains a doctrine of global power projection: that it should have the ability, through roughly 800 overseas military bases, to intervene with deadly force absolutely anywhere on the planet." It is this military might of the US that has led to the tax havens cooperating with it.

Nevertheless, as the Americans like saying: "show me the money". Or to put it simply, how much revenue has the Internal Revenue Service of the US managed to collect because of the FATCA? Jane G Gravelle, writing in a research paper titled Tax Havens: International Tax Avoidance and Evasion for the Congressional Research Service, estimates that FATCA is expected to "have a relatively small effect - $8.7 billion over 10 years - when compared with estimated costs of international evasion of around $40 billion a year". So on an average, the US expects to recover $870 million per year, when the international tax evasion by Americans is around $40 billion per year. Hence, the recover rate for FATCA is 2.2 per cent.

What this clearly tells us is that even the US does not expect much out of the FATCA, initially. This, despite being the only global superpower. In this scenario, how much chance does India have of recovering the black money that has left its shores?

As Bob Dylan once said (or should I say sang), "The answer my friend is blowin' in the wind".

Writer

Vivek Kaul Vivek Kaul @kaul_vivek

Author of the Easy Money trilogy.

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