The season has been a season of swindles, kickbacks and scams. To top these all, a new study by the US-based Global Financial Integrity on the illicit flight of money from the country, perhaps the first ever credible attempt, concludes that India has been drained of $462 billion (or over Rs 20 lakh crore) between 1948 and 2008. The amount is nearly 12 times the size of the estimated loss to the government because of the 2G spectrum scam. Moreover illicit financial outflows from India have grown at 11.5% a year, more especially after the reforms. Nearly 50% of the total illegal outflows occurred since 1991. Around a third of the money exited the country between 2000 and 2008.
The report “The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008” comes amid a renewed government push in recent months to pursue black money stashed abroad. In late August, the government signed an agreement with Switzerland that will enable exchange of information on tax evaders. The government is also in talks with at least 20 tax havens, particularly Mauritius, to extract similar information. Besides, the finance ministry has approached the National Institute of Public Finance and Policy to measure the total unaccounted money circulating in the economy.
Black money turned into an election issue during the 2009 general elections, with the BJP harping on the issue throughout its campaign. Its leader LK Advani has been the most vocal critic of the government on this issue, time and again questioning the government’s resolve to chase illegal funds. Mr Advani recently urged the government to publish a white paper on the issue.
The government has recently received praise from Paris-based Organisation for Economic Cooperation and Development, which has been at the forefront of the fight against tax evasion. OECD, whose relentless offensive is largely credited with lifting the veil of secrecy over umpteen tax havens, hailed India’s efforts to crack down on tax evasion and sign information exchange agreements earlier this year.
Tax havens are the countries where the evaded tax money of a sovereign country is stashed on account of a very liberal tax regime. The evaded tax money can take the form of either “hawala” or “money laundering” or “round tripping”. There are at least 91 tax havens hotspots flourishing across the globe. Asian countries, particularly Thailand, Singapore, Hong Kong and Macau, too are emerging as new destinations for parking illicit funds.
Besides Switzerland and Mauritius, Indian money is also said to end up in Seychelles and Macau. Due to the illicit nature of these deposits, pinpointing the journey’s end of the bulk of India’s black money is tenuous at best.
The report points out that the reported amount of black money can contract India’s external debt of $230 billion by half and still a significant would be left over to alleviate poverty, increase literacy levels and boost economic development.
The perpetrators of illicit outflows, says the study, are wealthy individuals and private companies. Black money is also abetted by the existence of an ’underground’ economy that emerged out of illegal activities and assets spawned by such activities.
The unabated growth of slush funds is borne out of a growing affinity of culprits for offshore financial centres, or tax havens, at the expense of banks in developed countries such as the US, France and the United Kingdom. The study finds that the share of deposits in offshore tax havens grew to 54.2% in 2009 from 36.4% in 1995.
In the absence of good governance and poor institutional oversight, the desire for the hidden ccumulation of wealth drives more of such transfers.”
Though India cannot end its black money problem alone, yet it can address some immediate challenges like strengthening legal institutions and procedure so that guilty does not go unpunished. Besides tax policies can be rationalized.