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Tax havens, a governance issue

india Updated: Jul 23, 2011 19:52 IST

Does the government seriously expect to conceal the names of Indians who have stashed their money overseas? Can it really be treated as a mere tax evasion matter? And does the public believe that the list of Indian account holders at Liechtenstein’s LGT Bank is packed with gun-runners and dons in shiny suits? Such unrealistic expectations are reducing the problem of offshore black money to a domestic political tussle. But potentially, it’s a global governance issue.

It isn’t just criminals who stash money offshore. Big corporations do it too, legitimately. Last October, for instance, it was claimed that Google uses financial manoeuvres colourfully known as the ‘Double Irish’ and the ‘Dutch Sandwich’ to funnel revenues to the Bermudas and save billions in taxes. The disclosure elicited admiration, not outrage, because Google had legally slashed its tax liability.

However, the Supreme Court wants to know if the Indian money in Liechtenstein is linked to terrorism and crime. The government’s reluctance to disclose names suggests that a political figure is criminally compromised, perhaps by kickback money. But don’t expect gangs of thugs to be outed. Drug cartels, gun-runners and hawala operators dislike tax havens, which often have stringent laws against money laundering, as in Switzerland. They prefer high turnover banking centres like New York. It is easier to lose yourself in a crowd than in an exclusive club, which is what a tax haven is.

So much for unrealistic public and political expectations. On its part, the government cannot hope to conceal the names, pleading that disclosure would violate international treaties under which they were obtained. The people’s right to know trumps external obligations. Technically, of course, the government is right in regarding this as a tax evasion matter, since almost all the names on the Liechtenstein list are probably just tax dodgers, not terrorists. But there’s more to it.

Tax evasion is an issue in India because these funds were not disclosed. Elsewhere, outflows to tax havens are legitimately disclosed and taxed. But governments are generally uneasy about the lack of transparency which is a feature of most tax havens. Hence the concerns about money laundering, kickbacks and the diversion of funds to finance crime and terrorism, which should be addressed.

This can’t be done bilaterally. India has signed 79 double taxation avoidance treaties, but only five of them permit the exchange of banking data. Perhaps a multilateral mechanism is required to enforce transparency and uniform banking procedures across borders. There are about 40 tax havens out there, which constitute a segment of the global trade in banking services. There are bargaining mechanisms to regulate the flow of wealth in other forms - intellectual property and trade goods, for instance. Why not one for banking?

The big powers would not propose such a thing. Too many of them have used tax havens for ignoble purposes in the past. But a proposal can be moved by India, which has consistently been the loser in this game, having lost colossal sums in taxes, weathered the Bofors scam and suffered decades of terrorism. India is about to assume a larger role at the United Nations. Can we begin to play the part and bring a serious global governance issue to the table?

(Pratik Kanjilal is publisher of The Little Magazine)

*The views expressed by the author are personal