Updating the tax haven debate

In a comprehensive analysis of black money, R Vaidyanathan's book explores the intricacies of its generation, the impact of tax havens, and the role of global initiatives

Black Money and Tax Havens

Author:  R Vaidyanathan

Publisher: Penguin

Pages: 208

Price: Rs 399

In any informed or uninformed discussion on money in India, the reference to black money is a given. Also given are the estimates of its stash with hugely diverse numbers put on the table.

The causes ascribed for the generation and utility of black money range from the usual ones, such as opaque election funding, apparent tax evasion, the entertainment industry and now, the latest, mobile-based apps for easy money.

Understandably, it is the middle class that is most engaged with the issue. The government’s demonetisation experiment of 2016 was the result of the collective fulmination of this section of Indian society. Since black money, by definition, is tax evasion, its generation and detection becomes a cat-and-mouse game between the law and the creators of illegal wealth, investing the issue with a certain degree of excitement for the public. The media’s extreme focus on demonetisation policy during the exercise and the fact that cash returned by the public to the Reserve Bank of India (RBI) after demonetisation touched the central bank’s estimate of M1  (currency with the public) kept

the issue in the public discourse for long afterwards.

Perhaps for the same reason, the Indian government agencies even now make their investigations into tax cases quite public. But doing so has often been counterproductive. Indian tax authorities have found their requests for information from abroad stymied as offenders have managed to successfully convince authorities abroad of the lack of confidentiality in India. Those disclosures could be politically rewarding but fatal to the provisions of the Double Tax Avoidance Agreements India has with them.

OECD reports often point out that black money gets generated in a governance environment of over-rigid but unenforceable tax rules. The lack of capacity of government officials to pin down the problem stems from this information asymmetry created by hard rules surrounding every economic activity. The state rails against this situation but responds by creating an ever-larger bureaucracy that promptly degenerates into a spoils system.

No surprise, books on black money thrive in this environment. R Vaidyanathan has good reason to write one. The former IIM Bangalore professor had written on the same theme in 2018. This book brings many of those themes up to date. This time, the issues surrounding tax havens and the logical corollary of the theme of black money gets a far more detailed treatment. This is welcome and also expected.

Since the general principles of how black money is generated are well-known, academics are not left with much scope there. They have to recount the various recorded episodes of how unaccounted income is generated and then estimate how much those possibilities add up to as a percentage of gross domestic product (GDP). Here, too, going back to the venerable Wanchoo committee of 1971 and then several iterations, including the National Institute of Public Finance and Policy (NIPFP) report of 1985, and the more recent study on unaccounted wealth within India and abroad  jointly by NIPFP, the National Council of Applied Economic Research and the National Institute of Financial Management commissioned by the finance ministry in 2011, the numbers have swung from 20 per cent of GDP to 50 per cent-plus.

Dr Vaidyanathan has been a commentator on many of these efforts. He has been a member of many committees set up by financial regulators — the Reserve Bank of India, Securities and Exchange Board of India, Pension Fund Regulatory and Development Authority, and the Insurance Regulatory and Development Authority. Plus, as a member on the boards of many companies, he would have a ringside view of the shenanigans by the wealthy regarding their tax liabilities.

But of late, the issues surrounding tax havens have become significant. For years, India has been a lone horse at G20 on tax evasion as a scourge. It has only now that the theme has begun to acquire traction in the global fraternity. Starting from 2008 and culminating in 2012, India became a member of the OECD-led Financial Action Task Force (FATF). One of its key agenda is to combat the generation of tax crimes. But the admission of India or the actions of the Egmont member group was not considered a big deal, till recently.

Thanks to the upsurge of interest in the global commonwealth about inequity, FATF has become significant.

Unfortunately, FATF actions, often long-winded, are not calculated to be very media-friendly. Yet it is the most significant jammer of global black money generation. As a long-time distinguished observer of the phenomenon of black money, Dr Vaidyanathan is eminently well placed to contribute dollops of analysis into the discussions on black money. This has particular relevance for tax havens, which are often little known island-nations located near to international financial centres. They have very little domestic income to tax but huge economic opportunities to exploit by attracting the super-rich to spend money, including ill-gotten wealth, there.

While Dr Vaidyanathan reveals his distaste of this pattern of finance, a detailed examination of the role of  FATF and suggestions on where it is still lacking is a useful addition to the discourse.