Financial Transparency Coalition

In April of 2009, after becoming very upset by the evidence there are rivers of ‘black money’ flowing out of India, the president of the Bharatiya Janata Party (BJP), Rajnath Singh, told voters that if they elected his party into office he would, within 100 days, “bring back all the black money stashed in foreign banks and distribute [it] among ‘the common poor people.’”

As we know, the BJP did not come to power in India in 2009 so fortunately for Rajnath Singh, his party never needed to prove this monumental task was possible. It’s not, by the way.

At the time Global Financial Integrity (GFI) had estimated annual illicit financial flows from India were somewhere between $22 and $27 billion. Last year GFI released another report examining IFFs from India and found that between 1948 and 2008 India lost a total of $462 billion as a result of corruption, bribery and kickbacks, criminal activities, and efforts to shelter wealth from a country’s tax authorities.

Since then, India has only become more excited about black money. There has been relentless pressure from Indian citizens and politicians on President Manomohan Singh to “bring it back;” a phrase which has become something of a common term in the world’s largest democracy. Unfortunately for India, this has proven to be a monumental—make that impossible—task. As Dev Kar, GFI’s Lead Economist has suggested, to differentiate the licit from illicit would be like distinguishing two cups of water—one hot and one cold—that were poured into the same bowl. It just doesn’t work that way for many reasons. For one, that illicit money has accumulated overseas for decades, which means that some of it wasn’t illegal at the time it was sent away, some of has passed its statute of limitation, and for much of it the home country just doesn’t have jurisdiction over.

More recently, India has expanded its efforts in the international arena. This is important because curtailing flows of black money is easier—and more significant—than efforts to “bring it back.” To this end, India recently joined the Financial Action Task Force and the Task Force on Financial Integrity and Economic Development’s Partnership Panel. It has also completed negotiations for 16 new tax information exchange agreements (TIEAs) with mostly notorious tax havens, including: the Bahamas, the Isle of Man, the British Virgin Islands, Cayman Islands, Jersey, and Gibraltar. MC Joshi, the chairman of the Central Board of Direct Taxes (CBDT), notes this progress “coupled with the fact that negotiations have been completed with 56 jurisdictions in the past two years for Double Taxation Avoidance Agreements and TIEAs…will enable us to combat evasion and avoidance of taxes.”

Unfortunately for India, however, the country may not be so lucky. While this is all a very good step in the right direction, TIEAs are not nearly strong enough to allow for effective fight against tax evasion. Under TIEA requirements, tax information is only provided if another country specifically requests it. This means that countries must have a reasonable idea that a certain citizen is evading tax, which would first require an investigation or other such effort. As Raymond Baker, Director of GFI, has noted “these agreements […] maintain bank secrecy.” He argues India should approach “the European Union for an agreement to have automatic exchange of tax information with the EU…A country of the size and power of India should say: ‘We want the same agreement that you have going between the countries belonging to the EU.’”

But I don’t mean to minimize India’s accomplishments. The country’s discussion of black money has matured substantially in the two years since the BJP was shouting about bringing it all back in 100 days. At the time, I postulated that black money was merely a fad in India and that “its promises to recapture its billions…won’t have much effect on its long term public policy initiatives.” My statement has been proven very, very wrong. India is deadly serious about black money and becoming increasingly more serious about curtailing these flows. Given the progress of the last two years, in the next two, we may see India on the forefront of the international arena, calling for automatic tax information exchange.