Recent Developments In Taxation Law Agreements Between India And Switzerland

Recently, India entered into a revised double taxation avoidance agreement with Switzerland. A debate ensued in the Lok Sabha with leaders such as L.K. Advani asking for clarification on what benefits the agreement will truly provide to India. The terms of the agreement are confusing indeed and there is no clear sense of the benefits that such an agreement will provide to the country. Finance Minister Pranab Mukherjee however made it clear that this treaty will not help India in getting back any black money stashed away by Indians in secret bank accounts nor would it expose details of the account holders. According to Mukherjee, Swiss Laws are very strict and the banks don’t give any information of their banking transactions. Moreover, the only information obtained cannot be publicly disclosed and can be used only for taxation purposes. In other words, it is not meant to recover any black money.

According to the influential Swiss Bankers Association, India has roughly about $1.5 trillion of black money deposited in Swiss banks. India has more black money than the rest of the world and is equivalent to one year of India’s GDP. This is a tremendous amount of money that when utilized for the right purposes in India can educate children, fund much needed infrastructure projects and remove the majority of poverty in the nation over the next 15-30 years. Ram Jethmalani has been a recent advocate of the need to retrieve black money deposited by Indians in Swiss Banks. “A staggering $1500 billion Indian money has been stashed away in Swiss banks. If it is retrieved, each Indian family will get Rs 2.5 lakh each. India will have a debt-free budget for 30 years and all our external debt will be wiped out,” Jethmalani told a seminar organized by the Telangana Advocates Joint Action Committee, making a case for why regional differences would no longer matter when prosperity exists in the nation.

However, there are certain realities to consider in the background of this agreement, which even if not historical, is a significant step made in the right direction. Given the challenge with Swiss laws and the Indian political, legal and economic establishment, recovery of black money in part or in its entirety is not feasible. Swiss banks are not the only holders of India’s black money. A parallel economy has existed in this country over the past 50 years and inflexible taxation laws have led to Indians stocking large amounts of unaccounted money. This was also fueled by the existence of the License Raj in India until its slow demise in the early 1990s. Several countries including the US and Germany have been pushing Swiss banks for access to their citizen’s accounts for years together through several lawsuits and political pressure. However, all those efforts have only resulted in one success just for the US government. UBS, the second largest Swiss bank, agreed to hand over account details of about 4,450 tax evaders to US authorities out of a total request for account details of 52,000 clients.

Even without any effort at retrieval of existing black money, if we can stop the bloodletting by preventing further black money from flowing out, the benefits to the country are significant. Say, a wealthy person deposits Rs. 10 crores in black money (about US $2 million) in a Swiss bank. That money through the banking system will eventually fund and fuel the Swiss economy by providing its local governments and corporations with unprecedented access to investor money. The Indian economy on the other hand is sitting to lose not only that investment potential but also 30% of that amount (at least in taxes) or the equivalent of Rs 3 crore. It is anyone’s guess that such money could be used to fund huge development projects in the country to truly alleviate “materialistic” poverty.

Swiss bank laws support a very strong secrecy pact that in effect prevents anyone not authorized by the account holder from accessing account details. This applies even to governments seeking information on any suspected individuals. The reasoning as one Swiss official put it in a NPR radio interview several months back is to protect the privacy of the account holder and the safety of his assets. This has been evangelized over the years by the Swiss government and still continues to be their selling point. The Swiss laws make a glaring distinction on legal grounds between tax avoidance and tax fraud or evasion. The Swiss government agrees to cooperate willingly on tax fraud issues but not on tax avoidance. Understanding the difference between these largely similar terms is baked in technical language that is difficult to easily comprehend. The challenge that several countries including India face is that there is a lot of evidence needed to build a tax fraud case. That evidence is in turn already hidden in the bank asset details of a citizen under investigation. In other words, to request bank account details of India’s citizens, the government needs to build a case for evidence of tax fraud. However, to make an effective case for tax fraud, you need the bank account details of these citizens. Hence, a never ending loop is created and the ability to generate any viable results in favor of the country requesting bank account information may come only through a miracle of legal maneuvering or political hardballing. This is where the recent amendments to the DTAA with the Swiss government still continue to pose a major challenge to India if it truly wishes to retrieve black money and redirect it for the benefit of its people.

The irony of this situation lies in the fact that except for reasons of tax evasion or fraud, there is no other reason a person from developing nations such as India would stock money in a Swiss bank. India’s large population of the poor and middle class societies may never have visited or even heard of such banks. Even with the globalization of the banking sector in the recent past, Swiss banks don’t dominate the banking landscape of the country, although some American banks do. It is India’s minority network of politicians, bureaucrats, celebrities and other rich members who have the means and maybe the will to utilize these banking services. Populist taxation measures not built on true economic benefits for the nation but at the same time targeting the wealthy also seem to serve as a motivation for this section of the society to preserve its assets in other forms detrimental to the nation’s growth. Also, when it comes to safety of assets, most well established banks provide enough safety measures to protect the assets of its clients that this cannot be the motivating factor for someone seeking to transact with Swiss banks.

So, even though the merits for someone to save assets in a Swiss bank is not convincing enough to term it as a non issue, the means to get to money moving out of the country is not bright either. In the years to come, the hope is that the DTAA and other tax agreement measures are continuously improved so that its true purpose in preventing and redirecting black money to the mothership country is well served. Also to be considered is the ability to build taxation laws that are not complex, not populist and not cumbersome to comply with. In today’s age of globalization, assets move between countries at a very fast pace. The ability for India’s banking infrastructure to effectively participate in this global effort is important to sustain the long term potential of the country to renounce the parallel economy and participate in the country’s growth forward. The amendments to the DTAA may be a misdirected step in one opinion or a small step forward in another opinion, but it takes the collective will of several entities in India to address the root cause of it.


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