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Economy

Tracking India's 'black money'

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The Narendra Modi government proposes to revive rules designed to prevent Indian companies from channeling profits to overseas tax havens.   © Reuters

NEW DELHI -- Within 24 hours of assuming office on May 26, India's new Prime Minister Narendra Modi set up a special investigative team to go after the huge amount of "black money" squirreled away by rich Indians in overseas tax havens.

     In 2012, the country's Central Bureau of Investigation estimated that $500 billion in untaxed funds was hidden abroad by Indian nationals. Arun Kumar, author of "The Black Economy in India" and economics professor at Jawaharlal Nehru University, says today's figure is closer to $2 trillion, compared with the country's gross domestic product of around $1.9 trillion last year.

     Modi needs that money to help fund his election promise of bolstering the economy and to lift the quality of life in the country.

     The previous Congress-led government made little progress and Modi has promised to pursue the matter in a more proactive manner. The new finance minister, Arun Jaitley, promptly wrote to the Swiss government to demand names of Indians who are illegally parking money in Swiss accounts. Negotiations are ongoing.

     The Modi government also proposes to revive rules designed to prevent Indian companies from channeling profits to overseas tax havens. But the business community has reacted angrily to plans to implement the General Anti-Avoidance Rules, which were shelved by the previous government, and there is likely to be a long consultation period.

     Global Financial Integrity, a U.S.-based organization that works on ways to reduce illicit flows of funds, has discovered in its research that only 27.8% of India's black money is held domestically while the rest makes its way overseas.

     "Black money represents a large part of India's bustling economy where transactions are carried out in cash, circumventing banking channels," said Probir Das, a New Delhi-based chartered accountant formerly with the government's Income Tax Department.

     On May 6 this year, India and 46 other countries became signatories to a new global agreement which requires members to share the tax information of each other's citizens. It is hailed as a powerful system which will tear down stringent bank secrecy rules that have until now hobbled tax-evasion probes in key money centers.

     The automatic sharing of tax data will replace a cumbersome system under which a tax authority of a country can only ask a foreign counterpart to supply data on specific individuals. The agreement also requires financial institutions to disclose the ultimate beneficiaries of shell companies and financial trusts.

     Financial analysts warn that Modi's task will be far from easy. Ashutosh Mishra, executive director of Transparency International India, said the issue was of a highly complex nature and one that required a holistic approach.

     "So far India's approach to this highly subjective and dynamic issue has been highly bureaucratic. As well as retrieving funds parked abroad, serious attempts also need to be made to prevent the generation of black money. Why do Indians do it and how can we prevent it? The government needs to develop a multidimensional approach to strike at the very roots of this unwanted economy," said the New Delhi-based expert on corruption.

     Mishra suggests stronger regulatory mechanisms to catch illegal investments, introducing more liberal tax reforms and inviting more participation from international governments and global organizations.

Find it first

It is also unclear where all the money is. Das said that high net worth individuals and private companies rely on three global tax havens -- Switzerland, Liechtenstein and the British Virgin Islands. The CBI said in 2012 that Indians were believed to be the largest depositors in Swiss banks, but Switzerland denied it. According to the Swiss central bank, a surprisingly small sum of $2.3 billion is kept there by Indian depositors.

     Ved Jain, chairman of the direct taxes council at the Associated Chambers of Commerce and Industry of India, suggests a six-month amnesty scheme to encourage the repatriation of black money and to tax the returned money at 40%. There was a precedent: An amnesty was given to the hundreds of Indians who hid money with HSBC in Switzerland and whose names were leaked by a former employee. Similar amnesties have been extended in the U.S. and Germany, Jain said, and the governments received billions of dollars in unexpected revenue.

     Modi, who enjoys a reputation as a good administrator as well as a shrewd negotiator, would do well to develop a bold and innovative approach in chasing this black money and move a few obese accounts into the red.

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