What is “black money”? Black mo-ney is wea-lth held by an indivi-dual or a company in violation of the laws that are applicable to them. It can broadly be classified as capital that has been subject to tax evasion or are the proceeds of crime. Where is this money then parked? Among other places it is kept in autonomous jurisdictions that are colloquially referred to as tax havens or offshore financial centers (OFCs).
What are then tax havens or OFCs? They are countries that utilise their sovereignty to create Preferential Tax Regimes (PTRs) that are backed by a legal architecture that guarantees confidentiality to those who utilise these arrangements.
The Bank of International Settlements (BIS) estimates that around half of all international banking transactions are channeled through such tax havens. About one-third of all foreign direct investment of international conglomerates goes through these OFCs. While corporate tax avoidance is difficult to ascertain, it is estimated that individual tax evasion is close to $1 trillion yearly.
In India, the size of the black or non-formal economy is assessed at about $2 trillion. This is equivalent to the GDP of India. Paradoxically, the formal Indian economy floats on top of a capacious black economy. Most of this money is either invested in the stock markets or the real estate sector. Just compare the difference between the market value and the registered value of land, houses or commercial complexes in any part of the country. The cash component varies between 50 to 80 per cent even today.
How did tax havens originate? Like all things modern, it has an American touch to it. In the late 1880s, the state of New Jersey was in dire need of revenues. Legend has it that a New York attorney persuaded the then governor of New Jersey, Leon Abbot, to enact such legislation that would attract businesses to set up their headquarters in that state. The law had two constructs, easy incorporation and low rate of commercial taxation.
The state of Delaware soon followed suit with a new General Incorporation Act in 1898. While both these states were not tax havens in the strict sense of the word, they were the designers of the archetypes of easy incor-poration and amenable regu-latory ecosystems for non-resident companies and individuals. This is the basis of all contemporary tax havens even today. From 1920 onwards this practice started getting plagiarised by some Swiss cantons led by the canton of Zug. It soon got replicated on the European mainland also.
In the 20th century most of the noteworthy tax havens around the world developed around two principal geo-political poles: Some evolved with close links to the City of London that, even today, remains an important finan-cial center. It consisted of the British crown dependencies and overseas territories. It included the Channel islands, Jersey, Isle of Man, Cayman Islands, Bermuda, British Virgin Islands, Turks, Caicos and Gibraltar to name a few. The other developed in Europe and consisted of the Benelux countries, namely Belgium, the Netherlands, Luxembourg-Ireland, Switzerland and Liechtenstein. They were supplemented by Hong Kong, Singapore, Dubai, the Bahamas and the islands in the Pacific Ocean over a period of time. The only other important tax havens that were not a part of this axis were Panama and, to some extent, Uruguay.
Tax havens now span the entire world serving all the major financial and commercial centers. They have thrived with the patronage of influential global powers. In fact, judicial decisions in various countries have facilitated their growth. A landmark judgment being the 1929 ruling by a British court in the matter of the Egyptian Delta Land and Investment Co. Ltd vs Todd that laid down the principle for the entire British Empire, that if a company is registered in a particular domain but does not have activities there it would not be subject to taxation. The maxim “onshore but offshore” became a reality.
How does a nation then get intelligence or information from this web of offshore financial centres that circumscribe the globe? They are, after all, sovereign entities that have enacted edicts as a part of their developmental strategy to attract a certain type of global investment. Research establishes that those states that have a population of less than one million are more prone to become a Preferential Tax Regimes.
The European Commission during its investigation into tax abuse among the member states of the European Union discerned 206 such tax refuges. The number is only increasing. Since their entire economy is based upon this activity, their appetite to cooperate with countries that are looking for information on their nationals or companies for tax evasion or criminal acts is non-existent. It is only after the global economic meltdown of 2008, when the developed economies were under pressure and were looking for revenues, that they started focusing on these tax sanctuaries. The 2009 London communiqué of the G-20 devoted a whole section to re-regulating tax shelters.
Between 2009 and 2014, India also signed and updated 92 Double Taxation Avoidance Agreements (DTAAs) and 16 Tax Information Exchange Agreements (TIEAs) with various countries. It became a part of various multilateral arrangements to share information with regard to financial crimes and delinquencies. Thus, the UPA government laid the foun-dation for accessing infor-mation on Indian nationals and companies from such nations and tax havens.
Conventional wisdom has it that all these pacts presumably come with a confidentiality clause that broadly states that the information provided can only be used for the purposes of legal prosecution and associated processes and should not be made public. What can be the consequence of the information being made generically public? The implication may be that other countries could refuse to sign agreements with India and those who have signed them already may either repudiate them or refuse to provide information.
Reneging on such commitments could also create trust issues qua a broad spectrum of other multilateral accords India is a party to.
The BJP and its proxies were cognizant of the provisions of these compacts. That did not, however, inhibit them from riotously demanding that the names be made public immediately. They promised to do so once in government. It was then politically expedient to crow that the UPA had something to hide.
Correctly cornered by the Supreme Court recently, which is monitoring the black money matter, the current government did a U-turn and was compelled to concede that it cannot divulge the names that it has got from other countries till the departmental and judicial processes against those entities reach fruition. The names divulged till now are ostensibly post the culmination of these processes. With the Supreme Court on Tuesday rightly deciding to hold the government to its rhetoric and directing that all names be provided to the court by Wednesday itself, the chickens have come home to roost rather early for the NDA government.
The BJP has been caught in the trap of its own loquaciousness.
The writer is a lawyer and a former Union minister.
The views expressed are personal. Twitter handle @manishtewari
