Global Financial Integrity

India’s International Black Money Can’t Be Brought Back Though It Can Keep Coming Back

Black money has been a hot topic among us Indians over the past few years, especially Indian black money that has been stashed abroad, over the years. Possibilities of getting this money back to India have been raised and extensively discussed and can lead to flaring up of tempers on the University of WhatsApp.

In this scenario, any news item on the Indian black money stashed abroad tends to fly off the charts. The University of WhatsApp has been buzzing over the last few days on the news of Indian black money in Swiss Banks having gone up in 2020. This has led to surprise among the supporters of the present dispensation and happiness among those against it.

As the Press Trust of India reported: “Funds parked by Indian individuals and firms in Swiss banks, including through India-based branches and other financial institutions, jumped to 2.55 billion Swiss francs (over Rs 20,700 crore) in 2020.” This is a jump from 899 million Swiss francs (Rs 6,625 crore) at the end of 2019.

The Press Trust of India rightly doesn’t use the term ‘black money’ in reporting the funds that Indian firms and individuals have parked with Swiss Banks. Some amount of money can be taken out of the country legally every year and be deposited in Swiss banks (or other foreign banks for that matter).

This is not to say that all the funds that Indians have placed with Swiss banks will be kosher. But the fact of the matter is there is no way of specifically knowing that how much of it is black money. Black money is basically money on which taxes have not been paid.

Of course, after the Press Trust of India reported on it, other news media latched on to this story. In their reports, the phrase funds parked in Swiss banks was replaced with the term black money.

And soon headlines which said that Indian black money in Swiss bank jumps, were all over the place. Politicians from other parties also reacted to this piece of news and said that this was because of increased corruption under the Bhartiya Janata Party. This shows us clearly why nuance is neither a strength in politics or on the University of WhatsApp, for that matter.

The government immediately issued a press release, in which it said: “Media reports allude to the fact that the figures reported are official figures reported by banks to Swiss National Bank (SNB) and do not indicate the quantum of much debated alleged black money held by Indians in Switzerland.”

In all this noise, the more important points on Indian black money which goes abroad or doesn’t come back in the first place, were never made.

Let’s look at them here.

1) The money that Indians had parked in Swiss banks in 2020 has been estimated to be at Rs 20,700 crore. One dollar was worth around Rs 74 on an average in 2020. This works out to $2.96 billion. For the ease of discussion, let’s round this to $3 billion.

Even if all this was black money (which it isn’t), no media house bothered to ask a very basic question. How come the Indian black money in Swiss banks was just $3 billion? $3 billion on its own is a large number. But in the context of a nation which has had a history of a huge black money, this isn’t even small change.

2) A lot of black money is generated through trade misinvoicing. As Global Financial Integrity (GFI), an organisation which specialises in this area, defines this as “a method for moving money illicitly across borders which involves the deliberate falsification of the value, volume, and/or type of commodity in an international commercial transaction of goods or services by at least one party to the transaction.”

Imports coming into the country can be over invoiced. In that process, money can go out of the country without the required taxes being paid on it. Further, imports can be under invoiced to not pay customs duty.

In a similar way, exports going out of the country can be under invoiced and money that should have come back to the country, and taxes should have been paid on it, continues to stay outside its borders.

A number is put to this misinvoicing through the value gap analysis. As GFI explains in a report: “For example, if Ecuador reported exporting US$20 million in bananas to the United States in 2016, but the US reported having imported only US$15 million in bananas from Ecuador that year, this would reflect a mismatch, or value gap, of US$5 million in the reported trade of this product between the two partners for that year.”

While data on imports and exports is never perfect, a significant portion of any value gap is a result of misinvoicing, in order to not pay tax on money earned and ensure that it continues to stay abroad, or to simply move money out of a country. This is the largest component of illicit financial flows globally. In India, we call this international black money.

3) As per GFI, the average value gap of India from 2008 to 2017, a period of 10 years, stood at $78 billion per year, which in total amounts to $780 billion. This means that a significant portion of $780 billion would have left India during these years or should have come back to India, but never did. Of course, this is just one period of ten years that we are talking about. All this didn’t just start happening in 2008. Now compare this with the $3 billion lying in Swiss banks. That’s not even small change.

Also, it is worth remembering that we are talking about black money through just the misinvoicing route. As GFI points out: “Many illicit transactions occur in cash to prevent an incriminating paper trail. For these many reasons, our estimates are likely very conservative.”

Of course, this problem is not specific to India. China, Russia and Mexico were ahead of India, on this front, with an yearly average of $482.4 billion, $92.6 billion and $82.5 billion, respectively, during the period.

4) Take the case of 2016. The value gap of the misinvoiced imports and exports stood at $74 billion. As GFI points out: “The analysis shows that the estimated potential loss of revenue to the government is $13.0 billion for 2016. To put this figure in context, this amount represents 5.5 percent of the value of India’s total government revenue collections in 2016.” Given this, the government loses out on a significant amount of taxes because of international black money.

5) The question is, if so much money on which adequate amount of tax has not been paid, is going abroad every year or simply staying there, why doesn’t it reflect in the Swiss bank numbers. This is where things get interesting.

As the government press release referred to earlier points out: “These statistics do not include the money that Indians, NRIs or others might have in Swiss banks in the names of third–country entities.” This could be one possible reason.

6) The common perception in India is that all the black money that leaves India (or simply doesn’t come back) is in Swiss banks. This is totally wrong. There are around 70 tax havens all over the world. 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.”

And this money is spread all across the world and isn’t just held in banks in Switzerland. As Gabriel Zucman writes in The Hidden Wealth of Nations – The Scourge of Tax Havens, points out:

“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’s international black money could possibly be anywhere in the world. Also, a lot of this money is held “through intermediaries of shell companies headquartered in the British Virgin Islands, or foundations domiciled in Liechtenstein.” This ensures that the money is not easily traceable to those who took it out of the country or decided not to bring it back.

7) It is worth remembering here that all the focus on black money in India should have made people who stash their black money abroad, smarter. Clearly, when everyone and their grandmother knows about Swiss banks, the black money wallahs are bound to be cautious and ensure that they spread their money around across the world.

8) So, the question is how good are India’s chances of getting this money back? The money that has left Indian shores or should have come to India but never did, could be anywhere. Tax havens maintain secrecy to ensure that they remain attractive options for those who are looking to hide their black money. Hence, recovery will continue to remain difficult. If even a small part of this money is to be recovered, a massive amount of international cooperation will be needed.

9) While it might be difficult to recover black money from outside India’s shores, some of it does keep coming back to India through the foreign direct investment route. A lot of this money comes in through countries like Mauritius, Singapore, Netherlands and Cyprus. In 2020-21, 44% of the total foreign direct investment coming into India, came from these countries. This was a low figure in comparison each of the five years before that, when the proportion had stood at more than 60%. Of course, not all this money is India’s international black money, but a significant portion might be.

As the finance ministry white paper on black money published in May 2012 had pointed out:

“It is apparent that the investments are routed through these jurisdictions for [the] avoidance of taxes and/or for concealing the identities from the revenue authorities of the ultimate investors, many of whom could actually be Indian residents, who have invested in their own companies, though a process known as round-tripping.”

India’s international black money is also round-tripped to be invested in stocks. 

To conclude, instead of trying to chase this black money and get it back, it makes more sense for us to create economic conditions where this black money comes back to India and is invested in different projects. We should also try and simplify our tax system to ensure that the incentives to generate black money in the first place, come down. 

But then that hardly makes for great rhetoric and management of narrative, which is what Indian politics seems to be all about these days. As Thomas Sowell writes in Knowledge and Decisions: “Sober analysis seldom has the appeal of a ringing rhetoric.”

And that’s something worth thinking about.

Black money in our backyard

narendra_modi
Getting black money from abroad has been one of the pet issues of the Narendra Modi government. Black money is essentially money on which taxes have not been paid.
Estimates made by Global Financial Integrity in a report titled Illicit Financial Flows from Developing Countries: 2003-2012, suggest that around $439.6 billion of black money left the Indian shores, between 2003 and 2012.
India is ranked number fourth (behind China, Russia and Mexico) when it comes to the total amount of black money leaving a developing country. The interesting thing nonetheless is that the quantum of money leaving India has increased dramatically during the Congress led UPA years.
In 2003, around $10.18 billion left the country. By 2012, this had jumped by more than 9 times to $94.8 billion. Interestingly, the number in 2009 was at $29 billion. This clearly tells us that the second term of the Congress led UPA which started in May 2009 was fairly corrupt.
Also, the amount of money leaving China grew by 3.9 times between 2003 and 2012. In case of Russia the increase was 3 times, whereas in case of Mexico the increase was 1.6 times. Hence, the jump in the Indian case was clearly the most.
The $439.6 billion that has left the country works out to around 23% of the Indian GDP of $1.88 trillion in 2013. Given this, it is a large amount of money and hence, 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. And the answer in this case is no. Conventional wisdom has it that all this money is lying in Swiss banks. But that is an incorrect assumption to make.
There are around 70 tax havens all around the world. Given this, the money that has left Indian shores could be anywhere. Tax havens are unlikely to cooperate with the Indian government in helping it get back the black money stashed abroad. The economies of many tax havens run on black money.
So does that mean the government should give up on its pursuit of black money? Of course not. It should concentrate on the black money that is stashed in India.
There are no clear estimates of the total amount of black money in India. As per a confidential report submitted to the government by the National Institute of Public Finance and Policy (NIPFP) in December 2013, the black money economy could be three fourths the size of the Indian economy. This report was accessed by The Hindu in August 2014.
There are other estimates which are not so big. Nevertheless, what we know for sure is that only around 2.9% of Indians pay income tax. In fact, former finance minister P Chidambaram in his February 2013 budget speech had said that India had only 42,800 people with a taxable income of Rs 1 crore or more.
Now compare this with the fact that around 30,000 luxury cars are sold in India every year. Both Audi and Mercedes sold more than 10,000 cars in India in 2014. A February 2015 report brought by business lobby FICCI makes a similar point.
The report estimates that the number of dollar millionaires(i.e. with assets of Rs 6 crore or more) in India in 2014 stood at around 2.27 lakhs, up from 2.14 lakh in 2013. But the number of taxpayers with a taxable income of more than a crore is less than 50,000.
What this tells us clearly is that there is widespread tax evasion in the country. This tax evasion continues to generate a lot of black money, a major part of which continues to remain country. This is the black money that the government should be going after.
Information technology can play a huge part in this. In fact it already is. As the FICCI report cited earlier points out: “The Integrated Taxpayer Data Management System is a data mining tool implemented by the I-T department that is used for detection of potential cases of tax evasion. The tool assists in generating a 360-degree profile of the high net-worth assesses.” The government should work towards making this tool even more robust by building in more data into it, in the days to come.
Further, it has to get cracking on the real estate sector where the maximum amount of black money is invested. This black money generates more black money. Going after the biggest property dealers of the National Capital Region, where most black money changes hands, might be a good starting point.
The question is will this government (or for that matter any government) go after domestic black money, given that it finances almost every political party in the country. Now that is something worth thinking about.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the India Today magazine dated May 18, 2015

Recover black money from India first, Modi. Instead of making noises about what lies in Swiss banks

Vivek Kaul

Narendra Modi and his government have had quite a fascination for the black money that leaves the country. Black money is essentially money that has been earned, but on which a tax has not been paid.
During the electoral campaign for the 2014 Lok Sabha polls, Modi promised that all the black money that had left Indian shores would be recovered and Rs 15 lakh deposited in the bank accounts of every Indian. Later Amit Shah, the president of the BJP, dismissed this as a chunavi jumla.
In the budget presented in February 2015, the finance minister Arun Jaitley focussed on black money and said: “The problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully.”
At the same time Jaitley unleashed a series of measures to counter the menace of black money leaving the shores of this country. “Concealment of income and assets and evasion of tax in relation to foreign assets will be prosecutable with punishment of rigorous imprisonment upto 10 years,” was one of the measures that Jaitley spoke about during the course of his speech.
Recently, the Income Tax department issued new income tax forms which asked for a plethora of information from individuals travelling abroad. This was again seen as a step to curb black money. These forms had to be withdrawn after a wave of public protests.
As per the Global Financial Integrity report titled Illicit Financial Flows from Developing Countries: 2003-2012, around $439 billion of black money left the Indian shores, between 2003 and 2012. What is interesting is that in 2003 the total amount of black money leaving India had stood at $10.1 billion. By 2012, this had jumped more than nine times to around $94.8 billion. In comparison, the money leaving China during the same period grew by less than four times during this period.
Given this, one really can’t blame the government for being overtly worried about the black money leaving the country. Also, black money that remains in the country has some benefits. Cambridge University economist Ha-Joon Chang explains this in his book Bad Samaritans—The Guilty Secrets of Rich Nations and the Threat to Global Prosperity, in the context of a minister taking a bribe (which is also black money, given that the minister is not going to declare the bribe as an income).
As he writes: “A bribe is a transfer of wealth from one person to another. It does not necessarily have negative effects on economic efficiency and growth.” If the minister taking the bribe decides to spend/invest that money in the country, it has a positive impact on economic growth, as the spending creates economic demand and the investment creates jobs. At least in theory, the idea seems to make sense.
In comparison, the black money leaving the country is a total waste. As Chang writes: “A critical issue…is whether the dirty money stays in the country. If the bribe is deposited in a Swiss bank, it cannot contribute to creating further income and jobs through investment—which is one way odious money can partially ‘redeem’ itself.”
Once we take this factor into account Modi government’s crackdown on black money leaving the shores of the country starts to make immense sense. But the question is how good are the chances of recovering the money that has already left the shores?
There is a great belief in India that all the black money is lying with banks in Switzerland. But this belief is incorrect. As Chang writes: “Switzerland is not a country living off black money deposited in its secretive banks…It is, in fact, literally the most industrialized country in the world.”
Data released by the Swiss National Bank, the central bank of Switzerland, suggests that 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 last few years as black money and Switzerland have come into focus, it would be stupid for individuals or companies sending black money out of India, to keep sending it to Switzerland.
There are around 70 tax havens all over the world. And so this money could be anywhere. Getting all this money back would involve a lot of international diplomacy and cooperation. Also, the question is why would tax havens return this money. The economies of many tax havens run because of this black money and no one undoes a business model that is working.
An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland and beyond the reach of any tax authorities. Some of this money must have definitely originated in India.
Long story short—it would be next to impossible to get back any of this black money.
Now let’s get back to domestic black money. As per Chang this money if invested properly can create jobs as well as economic growth. In the Indian case a lot of this money gets invested into gold and real estate. Money going into gold does not create any jobs. And money that goes into real estate has driven up home prices in particular, all over the country, to extremely high levels. Most middle class Indians cannot afford to buy a home now.
Given this, it makes tremendous sense for the government to crack down on domestic black money, instead of making noises about recovering black money that has already left the shores of this country. Further, focus should be on ensuring that the number of people paying income tax goes up in the years to come.
In short, the black money menace first needs to be tackled domestically.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on DailyO on Apr 27,2015

45% of black money abroad has gone during UPA regime


Vivek Kaul

 

It’s a season of clean chits. The latest to join the bandwagon is Annu Tandon, the Congress Lok Sabha MP from Unnao, supposed to be close to Congress general secretary Rahul Gandhi.  “Allegations against me are absolutely baseless and malicious… I completely deny all this rubbish,” Tandon said, giving herself the clean chit.
“I had gone to the Congress meeting and have just learnt of the allegations…I feel saddened that instead of doing something to benefit the nation we are speaking about lowly matters,” she said, adding that Kejriwal was perhaps seeking publicity by making such allegations. She stopped short of saying I am ready to face any investigation, as politicians are won’t to say in such cases.
Arvind Kejriwal’s in his latest exposure has said that about Rs 6000 crore of black money was lying in the Geneva branch of HSBC as on July 2011.  This list included the brothers Mukesh and Anil Ambani, Reliance Industries, Motech Software (a Reliance Group company whose managing director Annu Tandon was), Naresh Goyal  of Jet Airways and Sandeep and Annu Tandon. Annu Tandon and her late husband Sandeep have been accused of having Rs 125 crore each stashed away in their HSBC Swiss Bank account.
There is no way of independently verifying who has how much stashed away in the Geneva branch of HSBC, unless the bank chooses to reveal it. But at a broader level it can safely be said that a lot of Indian money does end up in Swiss banks and other tax havens abroad.
And the quantum of this money going out of India is huge. A report titled Illicit Financial Flows from Developing Countries Over the Decade Ending 2009 released by Global Financial Integrity in December 2011, gives us some astounding numbers. This report was written by economists Dev Kar and Sarah Freitas and was supported by the Ford Foundation.
In the period 2000-2009 the illicit capital flows from India stood at a whopping $104billion. Currently one dollar is worth around Rs 55. Hence in rupee terms this amounts to a huge Rs 5,70,00 crore. To give the reader a sense of comparison the fiscal deficit of the government of India for the financial year 2012-2013 ( i.e. the period between April 1, 2012 and March 31, 2013) was initially estimated to be at Rs 5,13,590 crore. Fiscal deficit is the difference between what the government earns and what it spends. So the black money that went out of India in the period 2000-2009 was more than the fiscal deficit of the government of India in the current financial year. Hence the numbers clearly aren’t small by any stretch of imagination.
And this not a recent phenomenon. In another report titled The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008brought out by Global Financial Integrity and written by economist Dev Kar, it is shown, that black money has been going out of India for decades, though it has gone up in recent years.
Kar estimates that in a period of 61 years from 1948 to 2008, India lost a total of US$213 billion dollars due to illicit flows, the present value of which is at least US$462 billion. In rupee terms this works out to a whopping Rs 25,317,60 crore.  This number is almost 5 times the fiscal deficit of the government of India for the year 2012-2013.
And chances are this number is understated. As Kar writes “In all likelihood, this estimate is significantly understated because economic models can neither capture all the channels through which illicit capital can be generated nor the myriad ways in which the capital can be transferred.”
In an interview I carried out for the Daily News and Analysis (DNA) in April 2009, Professor R Vaidyanathan of IIM Bangalore had put the number at $1.4trillion or more than Rs 70lakh crore at that point of time.  “More amounts were stashed away during the Nehruvian socialist regime…In fact, in those days, the Indian rupee commanded a better value per US dollar, so fewer rupees could get a dollar. Hence the estimation that Indian money stashed away may be of the order of $1.4 trillion,” Vaidyanathan had said.
Another estimate has been put forward by Arun Kumar, a professor at the Jawahar Lal Nehru University in New Delhi and the author of Black Money in India. An article on Firstpost quotes him as saying “At least $70-80 billion goes out every year.” That is an astonishingly huge number. In comparison Kar and Freitas put the total amount of money that went out of India between 2000-2009 at $104billion.
What is interesting is that a major portion of the black money in India ends up at Swiss Bank and other tax havens abroad. As Kar puts it “The total value of illicit assets held abroad represents about 72 percent of the size of India’s underground economy which has been estimated at 50 percent of India’s GDP (or about US$640 billion at end 2008)…This implies that only about 28 percent of illicit assets of India’s underground economy are held domestically, buttressing arguments that the desire to amass wealth without attracting government attention is one of the primary motivations behind the cross-border transfer of illicit capital.”
Kar’s research also shows that a lot of black money has gone abroad since the United Progressive Alliance (UPA) government led by Sonia Gandhi came to power. Between 2004 and 2008 around $96.3billion dollars of black money has gone abroad. Kar puts the total flow from 1948 to 2008 at a little over $213billion. This means that nearly 45% ($96.3billion expressed as a percentage of $213 billion) of the total black money that has gone abroad since independence has gone during the rule of UPA. UPA came to power in May 2004.
What this clearly tells us is that crony capitalism has gone through the roof since Manmohan Singh became the Prime Minister of the country. Businessmen and politicians are the most likely candidates for sending their ill gotten wealth abroad. Also, the data is available only till 2009, and corruption has only gone up since then.
The money going abroad has also gone up since India adopted a policy of economic liberalisation in 1991. Between 1991 and 2003 around $50.3 billion of black money went abroad, as per Kar’s estimates. Hence between 1991 and 2008, a total of $ 146.6 billion ($50.3billion + $96.3 billion) of black money has gone abroad.
All this money going abroad has had a huge impact on the economic development of India. As Arun Kumar wrote in an article in The Hindu in August 2011 “India could have been growing faster, by about 5 per cent, since the 1970s if it did not have the black economy. Consequently, India could have been a $8-trillion economy, the second largest in the world. Per capita income could have been seven times larger; India would then have been a middle-income country and not one of the poorest. That has been a huge cost.”
Annu Tandon in her reaction to the accusation of stashing away black money to the tune of Rs 125 crore abroad said “I feel saddened that instead of doing something to benefit the nation we are speaking about lowly matters.”
Yes these are lowly matters but given that they have cost the nation so much, they need to be talked about. And since the government and the Congress Party refuse to talk about these things it’s up to the likes of Arvind Kejriwal and Prashant Bhushan to bring it to the notice of the nation.  And if that means, as Tandon put it that Kejriwal is seeking publicity, then so be it.
Oh and in the end, let’s be ready for another round of clean chits.
The article originally appeared on www.firstpost.com on November 10, 2012. http://www.firstpost.com/economy/45-of-black-money-abroad-has-gone-during-upa-regime-521434.html
(Vivek Kaul is a writer. He can be reached at [email protected])