New Estimates of Offshore Wealth Held by Indians
C. P. Chandrasekhar and Jayati Ghosh
It has long been known that the very wealthy are able to shift their assets abroad and stash them away in tax havens and other jurisdictions. There are various reasons for doing this: to hide ill-gotten gains, to avoid or evade taxation, to insure against currency depreciation and otherwise hedge bets about likely economic performance in India. Much of this knowledge, however, was just based on anecdotal evidence or the occasional release of data provided by leaks like those of the Panama Papers.
Now, however, we finally have more systematic attempts to measure and assess the extent of such illicit financial flows, thanks to important work done by the EU Tax Observatory. The just-released Global Tax Evasion Report 2024 is based on a major international research collaboration building on the work of more than 100 researchers across the world. It provides a treasure trove of information and estimates at global, regional and country level, based on new methodologies that allow for annual estimates of such illicit financial flows. This is enabled by the availability of new data resulting from some positive policy initiatives of the recent past, on the offshore wealth of households (from the automatic exchange of banking information) and on the activities of multinational companies (from the country-by-country reporting of sales and profits).
The Report has important conclusions at the global level. The overall reduction in individual offshore financial wealth has come about because of the exchange of banking information, which has enabled countries that have the information and that wish to do so, to crack down on such offshore wealth. Indeed, the unreported proportion of offshore financial wealth has come down from an estimated 90-95 per cent in 2007-08 to around 30-40 per cent currently. However, new forms of offshore assets are emerging and becoming significant, such as real estate. Also, corporate tax evasion through mispricing across subsidiaries to shift profits to low tax or no tax jurisdictions, continues apace and has even ballooned in recent years, despite (or perhaps because of?) the rather weak efforts of the OECD.
But here we focus on what the Report tells us about offshore wealth held by Indians.
Figure 1
Figure 1 provides estimates of the total offshore wealth held by Indian residents in some major tax havens. This is calculated using a methodology developed by the French economist Gabriel Zucman (a co-author of this Report) which uses the anomalies in international investment positions across different countries. Essentially, when individuals own portfolios of financial securities—stocks, bonds, mutual fund shares—offshore using intermediaries, these holdings cause anomalies in international investment statistics. For example, when an Indian resident holds US stocks through a Swiss bank account, this is not recorded as an asset held in India, or in Switzerland (where the net position is zero) but it is recorded as a liability in the US. This is why, globally, financial liabilities are greater than assets. Zucman showed that this discrepancy can be used to estimate the extent of offshore wealth held in different jurisdictions.
The data in Figure 1 are calculated by multiplying the estimates in the Report (which are provided as shares of GDP) by the GDP estimates for India (in US dollars) of the World Bank. The results are startling. Far from declining (as it has done in much of the rest of the world, largely because of the exchange of banking information making it harder for the rich to evade taxes) offshore wealth holding has increased quite significantly in absolute terms after 2018. Between 2018 and 2021, the amounts held in just these jurisdictions went up by $12.8 billion, from $19.8 billion to $32.6 billion. This fits in with the perception that economic growth in India has disproportionately benefited the rich, who have also therefore increased their illicit transfers out of the country.
The changing direction of these flows is also worth noting. It turns out that Switzerland was not really an important final destination; rather, it has probably been more of a conduit to holding financial assets elsewhere. Flows to both American and European tax havens have increased, but the really notable increase in the recent past has been to Asian tax havens, such as the UAE and Singapore.
Of course, this immediately raises the question: since India is part of the system of automatic exchange of banking information, the pattern of these flows, their final destination and the holders of these assets, must all be known to the Indian tax authorities. So why is more not being done to track these, check on the holders, and at the very least force them to pay taxes at least on the returns from these assets? The same organizations that are now kept so busy with imposing multiple cases against political Opposition leaders and dissenters of the current government would do well to take up the direct examination of such financial wealth held abroad, which is in fact damaging to India’s economy.
Figure 2
In addition, a significant amount of offshore wealth is now shifting to being held in the form of real estate. The researchers have delved into those locations that actually do provide ownership data on real estate. Figure 2 describes the results for Indian wealth holders, and Dubai emerges as the top destination for such assets, followed distantly by Singapore and London.
The one area in which the Indian government appears to have been slightly more effective is in terms of reducing the tax avoidance by multinational companies, which appears to have come down since 2015—possibly because of the institution of the turnover tax on sales of global digital companies. (Figure 3) However, the significance of non-EU tax havens in such profit shifting remains high.
Figure 3
Another reason could simply be that the effective tax rate on corporations has actually fallen within the country, so that there is less reason for companies to shift their profits out. Figure 4 indicates that the effective tax rate on companies has fallen from 13 per cent in 2014 to 11 per cent in 2020, even as the effective tax on labour incomes rose from 3 per cent to 5 per cent. It is unfortunate that in a country with such high income and asset inequality, the tax regime is also effectively becoming more regressive.
Figure 4
It is also the case that it is increasingly possible for the very rich to hold assets within the country without being taxed by utilizing various loopholes and because of inadequate requirements to reveal beneficial ownership of shell companies and trusts.
The Report identifies many strategies, at national and international level, to address these concerns. But clearly, such policies can only be undertaken with political will to do so. We have to see whether the Indian government will actually do something about such tax evasion by the wealthy, rather than just talking about it.
(C. P. Chandrasekhar was Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US. Jayati Ghosh is Professor of Economics at the University of Massachusetts Amherst, USA. Courtesy: Jayati Ghosh’s blog at networkideas.org, and Hindu Business Line.)
How Much Indian Black Money Is Stashed Away in Swiss Banks? Nearly $1 Trillion, Says This Book
R. Vaidyanathan
[Excerpt from: ‘Black Money and Tax Havens’, by R. Vaidyanathan, Penguin India.]
Ever since the Modi government rode to power with the promise of bringing back the billions stashed away by Indians in tax havens abroad, they have been constantly reminded of this promise. The National Democratic Alliance (NDA) drafted a new Black Money Act on May 11, 2015, and also announced a voluntary disclosure scheme till September 30, 2016, for declaring assets and until December 31, 2016, to pay tax at 30 per cent and penalty at 30 per cent.
In October, the government announced that it had collected Rs 4,147 crores ($623 million) as part of this scheme. Various estimates put the amount of black money from India anywhere between $181 billion and $1.8 trillion dollars. Regardless of which estimate one takes, the fact remains that even a fraction of the amount abroad has not been recovered.
Two examples suggest that governments may not be serious. The response of the government in the Supreme Court (in the Ram Jethmalani case) indicated that tax demands of Rs 71,848 crores had been raised against Hasan Ali Khan, his wife and other associates. If this is the tax demand, then the income on which this would have been raised could be more than Rs 1,50,000 crores. This is a mind-boggling figure since our national income for that year is of the order of Rs 60,00,000 crores.
But, something more interesting has been reported. The Swiss authorities told a news magazine that the Indian authorities had sent a request in January 2007 for legal assistance in the Hasan Ali Khan case but the documents were not valid.
The Centre, in an affidavit to the Supreme Court, had detailed the action it had taken against Hasan Ali Khan, his wife Rheema and Kolkata-based businessman Kashinath Tapuria, who allegedly were holding about $8 billion in a UBS account in Switzerland. In a communication from Folco Galli, information chief of the Swiss Department of Justice and Police, Berne, the magazine Hardnews was informed that the Indian authorities had submitted “forged” documents to seek assistance.
In its May issue, the magazine said the Swiss sought more information. Apparently, the Swiss authorities wanted to provide further assistance in the case if the Indian authorities could satisfy the Swiss government’s demand to establish dual criminality i.e., what is a crime in India is also a crime in Switzerland. The Swiss also wanted to know whether the offence was an object of Indian money laundering. But since April 2007, the Indian government has not responded.
Also, in the space of nine years (between 2007 and 2016), Hasan Ali’s tax liability “dropped” considerably. In 2016, the Income Tax Appellate Tribunal (ITAT) in its ruling brought the income figure down to Rs 10 crore, and the tax liability a mere Rs 3 crore, after the IT department failed to establish its claims in court. On the list provided by the German authorities, the government maintained that it could not reveal the names since it had been obtained under the double taxation treaty. But it said that it was proceeding against account holders under tax laws.
The question as stated earlier remains: Why did the government ask for information under the double-taxation treaty from Germany when the names were from Liechtenstein? Moreover, where was the issue of confidentiality vis-à-vis criminals? Germany had released its own list and how could they ask India not to release the list?
The Finance Ministry at that time said it had the names but would not reveal them and the affidavit suggested that the petitioners could go through the Right to Information (RTI) route. Of course, the RTI application would have been thrown out.
Julian Assange, in an interview with an Indian television channel, had clearly indicated that Indians accounted for a large number of Swiss bank account holders. He also recollected that many banks entertained customers only with a minimum of Rs 5 crore in assets. In another interview, the Swiss whistle-blower, Rudolf Elmer indicated that the names of account holders include Bollywood icons and sportspersons. Obviously, no aam aadmi is going to find mention in all these lists. Other than these, the Panama Papers revelations of 2016 also indicate substantial Indian involvement.
The Associated Chambers of Commerce and Industry of India (ASSOCHAM), the apex business body in India, in its study on black money published in 2014 estimated that $2 trillion is stashed away abroad in the form of black money. In June 2014, it had suggested that the new government come out with a six-month amnesty scheme that would facilitate the transfer of such funds back home on a voluntary basis with a payment of 40 per cent tax.
Another reason for illicit money being stashed abroad is commissions in defence deals obtained by Indian middlemen. The now infamous Bofors deal of the late 1980s needs a special mention since it toppled the then Rajiv Gandhi government. The recent AgustaWestland scam is another example. The alleged middleman in the deal, Guido Haschke, revealed that while AW 101 did not meet the technical (altitude) requirements of the IAF, the deal was signed after Haschke tweaked the contract with the help of his Indian contacts. AgustaWestland allegedly paid €30 million in bribes, of which €20 million was routed through Haschke and Carlo Gerosa.
A CBI report into the matter revealed that prior to SP Tyagi being appointed as Air Force chief, the IAF had “vehemently opposed” the lowering of the altitude requirement. This changed after Tyagi came into the picture and the IAF then reduced the altitude requirements, allowing AgustaWestland to re-enter the bidding process.
It might be worthwhile to arrive at some estimates and make some inferences regarding Indian illicit money abroad. In an article in the August 2009 issue of the Swiss Review, Konrad Hummler, the chairman of the Swiss Private Bankers Association claimed that nearly one trillion out of 2.8 trillion of Swiss money was black money. Julian Assange of Wikileaks fame had told an Indian TV channel that Indians were the largest investors in Swiss banks.
That means out of one trillion US dollars (the Swiss currency’s exchange rate was nearly the same as the US dollar) more than 50 per cent is owned by Indians. This alone comes to about $700-800 billion in 2008-09. This is only as far as bank deposits are concerned. Then there are other exotic financial products offered by Swiss banks – offshore also – where Indians are invested in. Furthermore, there are funds accumulated directly abroad through commissions in defence contracts (remember Bofors!) which are not going out of the country due to trade mispricing. Also, diamonds, pearls and rubies are kept in Swiss vaults. Since it has been nearly 12 years post the estimate by Hummler, it might be safe to say that the amount could easily be $1 trillion.
(Excerpted from ‘Black Money and Tax Havens’, R. Vaidyanathan, Penguin India. Excerpt courtesy: Scroll.in.)
