CA Lalit Munoyat
1) Today we are witnessing such a national situation which none of us might have even thought of. A certain group of politicians, bureaucrats, industrialists and other unwanted social elements are working 24 X 7 to loot and divert our hard earned money to many offshore heaven countries in anonymous and secret ways such that the identification of the owner of such hush money is virtually impossible particularly when our own government is making little efforts to trace and bring back the money.
2) Though the estimation of the quantum and magnitude of such money is rather a difficult job and according to some data provided by some credible sources Indians have parked a sum anywhere between $ 462 to $1500 Billion in the Swiss bank and that it is far ahead of the rest of the world combined together. (One billion = 100 Crore so $1500 = $150000 converted @ 46.50 per $, the amount in rupees is nearly Rs.22 Lakh Crore on the lower side and Rs. 70 Lakh Crore on the upper side. I am not good at mathematics and is not comfortable counting the number of zero that goes into forming money of this magnitude. Estimation may be wrong but the facts remain the same.
3) Are you shaken by these figures? If yes, then you may skip reading this article because what follows would be even more shocking. The money meant for the development of India and upliftment of the economically deprived Indians has actually been diverted to tax haven nations mainly Switzerland who are enjoying the immense benefit of this no-cost deposits. Perturbed by these astonishing figures the highest judicial body of the nation i.e. The Hon’ble Supreme Court was constrained to state that this money is “pure and simple theft” and castigated the government to find out those Indians who have parked such “gigantic amounts plundered from the national economy” in tax havens across the world. An amount which is approx. 12 times India’s foreign debts. The government expresses its helplessness not only in retrieving the lost money but also in revealing the names of the persons who are the beneficiaries of this loot and cites the reasons , inter alia, the breach of confidentiality clause in treaties on double tax avoidance with foreign governments as the dominant hindrance. Not satisfied with the given reason the Hon’ble Supreme Court stated “it is a pure and simple theft of national money. We are talking about mind-boggling crime. We are not in the niceties of various treaties.”
4) Why the Government is helpless. “You know the names, where the money is lying? What are the sources of the money? Where has the money come from? Still you are talking about double taxation issue,” the court observed. “What action have you taken against them when you came to know that they have stashed money in foreign banks?”
5) Reply: Perturbed by the wide criticism of the loot of such a magnitude, the government initiated some steps to know at least the names of the Indians having accounts with the Swiss Bank. The government raised first question to the Swiss :
Q: How many Indians do have accounts with Swiss Bank ?
A: Don’t throw a telephone directory at us and ask us to state the names of Indians appearing therein. Provide us exhaustive and exact details about the persons in respect of whom information is required from us and the purposes for which such information is required. The information can be shared only if the same is required for tax recovery purposes.
The Swiss will share information only in cases of dual criminality i.e. the offence has to be a crime – both in Switzerland and India. Tax evasion is not a criminal offence in Switzerland. If an Indian has an account in Zurich or Geneva and doesn’t declare the interest back home, the Swiss say that’s not their problem. If you wish to get information about Indians who have not been filing Income Tax Returns despite having huge taxable income you are inevitably going to get a negative response because it’s well known that ‘not filing of returns’ is not an offence under Swiss laws and therefore they are not bound to comply with the I-T department’s request.
In a classic case of one horse breeder of Pune , charged with income tax evasion of about Rs. 70000 Crore, the government of India submitted some documents to the Swiss authority in order to bring back his ill gotten money. Imagine the response: The Swiss authorities, after examining the documents submitted to them, had reportedly told the Enforcement Directorate that the papers seized from his residence and premises, were forged. It is widely believed that he is just a conduit , a hawala operator, involved in transferring the ill gotten money on a commission basis while the money actually belong to corrupt politicians and industrialist.
6) Government’s helplessness-A CATCH-26 question: The government has taken a stand that the crux of problem of tackling the Swiss Corruption is not its unwillingness to do so but rather the legal provisions contained in ARTICLE 26- EXCHANGE OF INFORMATION OR DOCUMENTS of the Double Taxation Avoidance Agreement (DTAA). ( Notification No. 9752 [F. No. 501/7/73-FTD] dated 21st April, 1995 as amended by Direct Tax Notification No. 35 dated 7 February 2001). Briefly stated the Article 26 provides
1. The competent authorities of the Contracting States shall exchange such information (being information which is at their disposal under their respective taxation laws in the normal course of administration) as is necessary for carrying out the provisions of this Agreement in relation to the taxes which are the subject of this Agreement. Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those concerned with the assessment and collection of the taxes which are the subject of this Agreement. No information as aforesaid shall be exchanged which would disclose any trade, business, industrial or professional secret or trade process.
2. In no case shall the provisions of this Article be construed as imposing upon either of the Contracting States the obligation to carry out administrative measures at variance with the regulations and practice of either Contracting State or which would be contrary to its sovereignty, security or public policy or to supply particulars which are not procurable under its own legislation or that of the State making application
So now we know why the government of India is helpless in disclosing the names of Swiss accounts. But the treaty was enacted in 1995 and last amended in 2001 when the circumstances were entirely different and type and the magnitude of the loot was not all that significant compared to the circumstances prevailing for last 5 years or so. However it is stated that the government of India has signed a Protocol with the Government of Switzerland in August 2010 for the purpose of amending the Tax Treaty between the Swiss Confederation and the Republic of India. But the amendment is still to be approved by the Swiss Parliament.
In the general election of 2009 the BJP has raised the issue of Swiss Black Money as part of its campaign and fearing being outrun in the election the congress also took the same issue. Now every Indian is entitled to ask Dr Singh and his party boss how does this compare with their assurance to the electorate in 2009 before the general election that Congress would bring back the national wealth secreted abroad. Was DTAA not Applicable then?:
For not going beyond DTAA route, the government is citing India’s commitment to international protocol on “jurisdictional cooperation” between nations as it does not want to “risk blocking” of the information channels from one country in a bid to get it from another through some other means.
7) How easy it is to get the names of the looters and the looted money Unearthing black money kept in Switzerland is not as simple an exercise. The reasons are countless but some of the reasons are as under:
1. Utter Lack of Willingness and Willpower of both the countries
2. Why would Swiss want to part with zero cost offshore deposits which it has used very efficiently in the economic development of the country. Once upon a time the Swiss economy was almost on the edge of collapse.
3. Even if it agrees to have received the looted money, from where or which source will it get the money of such a magnitude to repatriate. According to some latest published data the economic position of the Swiss is as under:
| S.N. | Economic Indicator | Value in US $ | Equivalent INR | Time Span |
| 1 | Gross Domestic Product | $ 491.40 Billion | 23 Lakh Crores | |
| 2 | FDI Stock | $ 395.60 Billion | 18 Lakh Crores | 31-12-09 |
| 3 | Gross external debt | $ 1339.00 Billion | 62 Lakh Crores | 30-06-09 |
| 4 | Public debt | 38.80% of GDP | 2009 | |
| 5 | Revenues | $ 190.30 billion | 09 Lakh Crores | 2008 |
| 6 | Expenses | $ 185.10 billion | 09 Lakh Crores | 2008 |
| 7 | Foreign reserves | $ 74.07 billion | 03 Lakh Crores | 31-12-08 |
Attempt your own interpretation & correlation of the above data
4. Likewise, there would be difficulties in tracing the trail of money if the money is invested by the person concerned outside Switzerland or in circuitous manner with the protective layer of several tax haven countries.
5. Wide publicity to bring back Swiss money back have alerted the looters who are working overtime to route this fund to India via tax haven Mauritius on fears of getting exposed for stashing the money in the European nation. These funds were coming as FIIs or FDI route and were fuelling stock market, real estate, infrastructure.
6. The scope of India-Swiss tax treaty have been widened to cover banking transactions. But, the treaty amended in August last year does not provide for fishing expedition or a roving enquiry. It is modelled on latest OECD Model Tax Convention that provides for information exchange in specific cases of tax evasion
7. When armed-twisted by the US, the UBS settled a damaging tax row with the United States by agreeing to transfer data on 4,450 clients to US tax authorities . But that deal was called in question by a Swiss court which ruled that most of the data cannot be transferred. The threat that UBS could lose its license in the United States, and face collapse as a result, has hung over the bank since the tax dispute escalated at the start of 2009.
8. The stability of UBS, which had to be rescued by the state in the middle of the financial crisis, is vital to Switzerland as the bank’s liabilities are worth several times the country’s gross domestic product. (Refer Economic Indicator Data Table above)
9. The government owes it to the nation to tell us why the open offer of the German Government to give the information it extracted from Liechtenstein was not accepted and instead the names were obtained through tax evasion route.
10. When there is a will, there is a way. Look at the table which portrays the Details of illegal funds recovered from tax havens by various countries since April 2009
| Germany | $5.40 billion |
| United Kingdom | $810 million, the figure is expected to touch $11 billion |
| France | $1.30 billion |
| Italy | $6.70 billion |
| Greece | $48.00 billion (In the pipeline) |
| India | Nil so far |
| (Source: Organisation for Economic Co-operation and Development.) | |
11. When the government knows it well that it can’t recover the black money by DTAA treaty why, then it has not chosen to sign any Tax Information Exchange Agreement (TIEA) with any country whereas a number of countries could recover huge amounts of illegal funds parked abroad (see Table above).
12. Liechtenstein, bordering Switzerland, is willing to share information relating to illegal money stashed by Indians in that country but there is a dispute about which Treaty should be used for the purpose. Liechtenstein insists on Double Taxation Avoidance Agreement (DTAA) while India prefers Tax Information Exchange Agreement (TIEA)
13. Double Taxation Avoidance Agreement (DTAA): Under this Treaty information can be shared only in so far as is necessary for in relation to the taxes which are the subject of this Agreement. Any information so exchanged has to be treated as secret and can’t be disclosed to any persons other than those concerned with the assessment and collection of the taxes which are the subject of this Agreement. No information as aforesaid can be exchanged which would disclose any trade, business, industrial or professional secret or trade process. The Swiss country will share information only in cases of Dual Criminality i.e. the offence has to be a crime – both in Switzerland and India. Tax evasion or non filings of tax returns are not criminal offences in Switzerland. DTAA covers matters relating to agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country.
14. Tax Information Exchange Agreements (TIEA) Under this agreement one country can request all financial investment information regarding their citizens and corporations. This most definitely includes bank account information and stock brokerage type investments. There is no probable cause requirement to get this information. There is no criminality or dual criminality required. There is not even a tax violation required. The terms used in these treaties run along the lines of the country requesting the information claiming that they believe the information to be relevant to their tax investigation.
15. What the tax evaders Do? – Keep their assets in countries that are not in any Tax Treaties and avoid any country with TIEA Treaty because in case of such treaty they are at risk even if they have nothing to do with the requesting country because the requesting country could always say that they or their corporation came up in the course of their Tax investigation against them and the other country is expected to take the path of least resistance and give up the information.
16. Liechtenstein is a low-tax jurisdiction and the government is worried that if it signs a DTAA it would be used for routing investment from a third country like in the case of other tax havens such as Mauritius. Finance ministry officials estimate revenue losses of over Rs 2,000 crore every year due to the country’s tax treaty with Mauritius. Under the treaty, a Mauritius-based investor does not pay capital gains tax either in India or in Mauritius. Thus, Mauritius has become an attractive route for investment into India.
17. Bank secrecy/privacy: It is a legal principle in some jurisdictions under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply (for example, a criminal complaint has been filed). Some tax haven countries like Switzerland, Singapore, Lebanon and Luxembourg thrive on this particular condition only. Under the guise of secrecy many banks institutions helped clients evade billions of dollars in taxes by routing money through offshore havens in the Caribbean and Switzerland.
18. Financial cryptography (FC) :- The Tax Haven countries provide maximum secrecy by the use of Financial cryptography and blinded signature. This special form of a cryptographic signature permitted a virtual coin to be signed without the signer seeing the actual coin, and permitted a form of digital token money that offered untraceability. This form is sometimes known as Digital Cash.
19. Unlink-able Transfers: Advanced algorithms is used to prevent third party linking two entities as being involved in the same transaction. Where names are used the goal is to minimize the release of traffic information, to prevent the unwanted accumulation of unique behavior patterns, which could be used to link names or could augment other means of breaching privacy. Blinding especially helps where rights holders. Blind signatures can be used to make certificate transfers unlinkable via any means
20. Anonymous Internet Banking is used to provide strong financial cryptography to make electronic bank secrecy (or more precisely pseudonymous banking) possible. The bank issues currency in the form of electronic tokens that can be converted on presentation to the bank to some other currency.
21. Numbered bank accounts is a type of bank account where the name of the account holder is kept secret, and he identifies himself to the bank by means of a code word known only by the account holder and a restricted number of bank employees, thus providing the holder with a degree of bank privacy in their financial transactions. It facilitates minimizing governmental scrutiny and taxation, perhaps to conceal an illegal or unethical origin of the money in the account or to avoid government interference in the affairs of a political dissident and it help legalized tax evasion, money laundering and more generally the underground economy. For example, the Swiss banking system will not reveal information about an account to any governmental agency unless proof of deliberate fraud is established, not merely the non-reporting of assets in order to avoid taxation. Most numbered accounts will require a large initial deposit. A deposit in the tens of thousands not heard of.
22. E-Cash is anonymous digital cash. It is all digital and all anonymous because one can make payments to everyone one can communicate with digitally. Make a payment by sending an email, an instant message, during a chat or via SMS. Likewise Digital Bearer Certificates are also in vogue which are also anonymous.
23. Under Swiss law, except for extraordinary circumstances neither the bank’s officers nor the bank’s employees are allowed to reveal any information, relative to any account to anyone, including the Swiss government. No private citizen or their legal representative can ever receive any type of information about any one’s Swiss bank account under any set of conditions. That includes all types of legal proceedings that the Swiss classify as “non-criminal behavior. However there are some notable exceptions. Three types of activity which the Swiss consider illegal are: 1) organized crime activities, 2) drug trafficking, and 3) “insider trading” of securities.
24. Tax Haven: A location, usually a country, where either rates of taxation or levels of enforcement are low, so that high taxes in other countries can be avoided by moving or locating there. Among the best Tax Haven, Dubai is very important. This is because of its strategic location catering to billions of consumers in Europe, Asia, Middle East, and Africa. Moreover, Dubai also has the largest international free-trade zones and high graded infrastructure along with the provision for zero taxes. Among other tax havens Hong Kong, which is the major gateway to China, is very significant for its dependable legal system to the offshore companies and trusts. Similar other popular Tax Havens of the world are Switzerland, the Republic of Panama, and Liechtenstein.
25. MAURITIUS GATEWAY: Mauritius houses many skeleton so-called management companies which control hundreds of giant ‘global business companies’, or GBCs, incorporated in Mauritius. India has a DTAA with Mauritius signed in 1983. However years after the treaty Mauritius has passed/amended many laws which has made it a most favored Tax Haven. Mauritius has become the perfect conduit for anyone to bring in enormous sums of money to India — or even take it out — anonymously, and without paying any taxes. These companies could operate in complete secrecy, would pay only a nominal tax (3 per cent net), have no real operations or assets within Mauritius, but enjoy all the privileges of the Double Taxation Avoidance Convention (DTAC). And it is not just global investors who are taking advantage of the favourable tax regime in Mauritius while investing in India. Officials in various arms of the government suspect that there are unscrupulous Indian businessmen who are sending out money through the hawala route, and then bringing it back as legal funds via Mauritius. It has also contributed the growth of Offshore Banking which is the root cause of underground economy and organized crime, via tax evasion and money laundering. As the money flows between the two countries increased, the Indian government started looking closely at the transactions. And as they investigated, a couple of points came into sharp focus. Firstly, the treaty, which had originally proposed to help Mauritian firms to invest in India and vice versa, was increasingly being used by global investors instead. The Indian view is that the GBC-1s can hardly be called true Mauritian companies. Sure, they have been incorporated in Mauritius, but they have no real operations there. In fact, the only purpose of their formation has been to avoid paying taxes in India. According to Indian officials, the GBC-1s are nothing more than shell companies. Post DTTA treaty Mauritius modified its laws to allow for setting up of GBC-1s and indirectly permitting them to obtain treaty benefits that would not be directly available.
26. The IMF has said that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2% to 5% of global economic output. Today, offshore is where most of the world’s drug money is allegedly laundered, estimated at up to $500 billion a year, more than the total income of the world’s poorest 20%. Add the proceeds of tax evasion and the figure skyrockets to $1 trillion. Another few hundred billion come from fraud and corruption. “These offshore centers awash in money are the hub of a colossal, underground network of crime, fraud, and corruption” commented .Among offshore banks, Swiss banks hold an estimated 35% of the world’s private and institutional funds
27. Gossips are gaining ground that the government is considering an Amnesty Scheme to bring back the Black Money from tax haven countries @ 30% tax. Such amnesty scheme creates a moral hazard and is used as a gilt-edged weapon to evade taxes and pay up, if circumstances so warrant. If any such scheme is in the offing then it will encourage people to indulge in more malpractices. Moreover, a tax of 30% on unaccounted income does not make sense when evaders multiply their money. However experts feel any such scheme will be a total failure because a substantial portion of the legitimate 57% of our GDP includes round tripping via Mauritius as well as FII flows through participatory notes originating in tax havens abroad which actually constitute black money. According to some estimates, unaccounted wealth by residents in offshore destinations could be a whopping $1.72 trillion, an amount that far exceeds India’s development requirement, even after paying off in full the country’s foreign debt. Even if the government is able to bring back a portion of this amount, say, 25%, it would be sufficient to meet the country’s infrastructure requirements and put India on the fast track of development.
28. WHY AMNESTY ?
a. An amnesty scheme provides only some revenue to the government out of the evaded income in the past as courtesy by evaders in lieu of host of concessions provided by the government with no punitive consequences for the crime of not paying taxes.
b. Such scheme does not help checking evasion but is extended as an incentive for evasion, which will get regulated in few years by amnesty schemes declared from time-to-time.
c. Such schemes have social and compliance costs, which cannot be measured in terms of money . Such schemes pollute the atmosphere, shakes the confidence of the taxpayer in the capacity of the government to deal with law breakers and invites contempt for its law enforcement machinery.
d. According to the Bombay High Court an amnesty scheme gives advantage to dishonest taxpayers; honest taxpayers suffered and honesty is placed at discount; dishonesty carries premium and there might even be a scope for abusing the scheme.
e. A simple calculation will prove the fact. If a tax payer has paid , on an average, 75,000/- as income tax for last 15 years then the total tax paid by him will be. Rs. 11,25,000/- At an interest rate of 12% p.a. the present value of the paid would be 16,32,000/- i.e. a tax rate of 45%.Besides this the tax payer must have incurred many expenses on maintenance of accounts, professional fees, payment of speed money for getting an advantage which is legally available to me. If the amnesty scheme permits the payment of the tax evaded i.e. Rs. 11,25,000/- today , will it not give a signal to the honest taxpayers to be dishonest and carry a premium of 15% if the proposed tax rate is 30%. All honest tax payers must unite to block any such attempt of bringing such an amnesty scheme which would discount their honesty by 15%.
Compiled by:
CA LALIT MUNOYAT
B.Com.(Hons.), CS, FCA, DISA
98201 93508
