Black Money: Problem Right, Solution Wrong

by Sharad Bailur - May 25, 2015 12:30 PM +05:30 IST
Black Money: Problem Right, Solution Wrong

Even if the Swiss co-operate and reveal the amount of money stashed by Indians in their bank, it is more important to find the root of the issue and change the laws that caused it.

The BJP went hammer and tongs with the proposition that billions of dollars were stashed away by shady Indian politicians (insinuating, from the Congress) in Swiss banks over the last 60 years. The charge is that this money is ill-gotten wealth and actually belongs to the nation and should be returned back to it; that the Swiss can be forced to reveal who it belongs to; that if the BJP was elected to power, it would force the Swiss to send all that money back to India; that then the money could be used for the development of India.

We of course know now that nothing of the sort happened, though the BJP won the election in significant measure because of this plank that they offered the electorate.

Let me recount what I know of the Swiss banking system. It is today without doubt the safest way to stash money abroad by hook or crook—mostly crook. Also, it is very easy to open an account with a Swiss bank. All you need is your passport as a proof of identity. Walk into any such bank in say Geneva, fill up a form and hand it in along with your passport. Once the passport is checked and verified and the form likewise, you can deposit your money in your new account, the number of which will be given to you on the spot. You are now an owner of a Swiss bank account.

How do I know this? My friend, an Englishman named David Meredith-Vagg, told me about it some years ago. He had one such account. David was my father’s assistant on the West Coast Times, a newspaper published from Margao, Goa. After the paper folded up, he got into various business ventures, one of which, a travel agency by the name of Davidair still runs out of Candolim on the north bank of the Mandovi across from Panaji.

With another Englishman, Glen Smith, David started a tiny air charter service named GoAir running out of Dabolim to small towns like Belgaum and Kolhapur. It consisted of two small single-engine Cessna aircraft and had been granted licences and clearances by the then Ministry of Civil Aviation in Delhi. The Minister for Civil Aviation then was oddly a model of probity. He had been born into enough family money. So he did not need to make more. One day a private plane landing at Delhi’s airport clipped the control tower, lost control and crashed. The Minister for Civil Aviation took the moral responsibility for the disaster, that killed, I think, two people, and resigned.

His successor called for all the licenses that had been granted to all private operators to run chartered services and David received a call in Candolim asking him to present himself at a private audience before the minister in two weeks time. David and Glen duly did this. In the interview, the minister told them to deposit $50,000 in a Swiss bank account, the number of which he would give to them. If they did not do so within a month, their air charter licences would be cancelled. Outraged, Glen and David returned to Candolim, flew their two aircraft back to England and closed down the charter service without further ado.

From this scenarios, it is probably true that politicians in a large number of countries routinely hold bank accounts in tax havens, which in all likelihood, contain ill-gotten gains, and have done this for decades. In India it is perhaps true of politicians from all parties, not just the Congress. The nature of the business of politics itself makes this a foregone conclusion.

Now to the issue: Can the Swiss be forced to reveal who it belongs to? On balance, I believe that any attempt to squeeze out information from Swiss banks will not succeed, irrespective of which government tries it. The German government is trying. The French have tried in the past. The Swiss government refuses to intervene.

The whole point of Swiss banking is confidentiality, as the British found to their chagrin at the start of World War II. They did not give away a hint and never have. If it were not for this iron-clad confidentiality, there is nothing much more that the Swiss banks do that other banks cannot emulate and perhaps better. The claim therefore that an incoming BJP government at the Centre would make the Swiss banks cough up the names of those who own accounts with them with huge balances was always pure pap.

Second, can the Swiss banks be forced to part with all that wealth at the behest of the government of a foreign country? At most, the issue will land up in the International Court of Justice at the Hague. That court can at best pass recommendatory advice to the government concerned. Its advice cannot be enforced in any real sense.

Let us suppose that the ICG does pass such advice to the Swiss government. Will the Swiss government act upon it? Almost certainly not. In previous cases like this, with similar orders, it has not. The Swiss economy would almost certainly teeter on the brink of collapse as would the Swiss banks. So that is out. How then does the BJP think it can get the Swiss banks to cough up—either names or money? What applies to banks in Switzerland applies to all tax havens all over the world.

What is black money? It is merely money that has not been accounted for and therefore not been subjected to taxation. Our situation in India is bedevilled by two other issues. One, we have  an unorganised economy that comprises perhaps 70 per cent or more of the total transactions that take place in the country. All these transactions take place in cash and usually no record is kept either deliberately or because the transactors couldn’t be bothered.

It is this unorganised economy that literally runs the country. And it generates huge employment, surpluses and demand, none of which ever gets recorded. We have no real knowledge of what is happening in, say, the backend of Bahraich or Basti or Gonda in Uttar Pradesh, Bastar in Chhattisgarh, Morena in Madhya Pradesh and or the Maoist-infested districts of Jharkhand, Odisha and Andhra Pradesh. There can only be rough estimations. So how does one tax such transactions? This is done only through excise on manufactured items.

Then again agriculture, allied agricultural activity including fishing and bee-keeping are not taxable. Why do you suppose generations of film stars maintain large farms? Unaccounted wealth can be hidden away by accounting it under agriculture on which no tax is payable. And nobody can ask a large farm owner where he got all that cash.

We had the recent example of NCP leader Supriya Sule claiming a huge income from the sale of produce from a handkerchief-sized plot of land! Once it is agricultural income, it is not taxable and can be legally deposited as accounted money in banks. It is no longer “black”. In fact, almost all such money generated that escapes the tax net is re-invested in land, financial instruments and other avenues that yield returns; and in gold. Most of it is not abroad at all. India is not known for its unaccounted wealth in the world fora. That dubious credit goes to dictators of all colours from all over the world, especially from Africa, who patronise every bank from St Lucia to the Channel Islands.

Lastly, as senior editor T.N. Ninan rightly put it in a television interview, let us suppose we do succeed in getting all that money back. Will it stop the outward flow of money to tax havens abroad in the future?

Re-addressing the root cause of the problem: We could not stop smuggling however hard we tried till the laws that controlled import and export were modified. India has a bank interest regime far more attractive than most other countries. So what makes money go out? Trace that and change the relevant laws so that money does not leak out to destinations abroad.

Sharad Bailur is a former banker who moved into Corporate Communications and worked for three major organisations in both the public and private sectors. He has been an occasional writer for most major publications in India over the last 40 years. Now retired, he lives in Mysore.
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