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Hidden Assets Seen Worth $2 Trillion Targeted by India

Photographer: Raj K Raj/Hindustan Times via Getty Images

Within 24 hours of his May 26 inauguration, Indian Prime Minister Narendra Modi created an investigative team of former judges and current regulators to find the missing cash and bring it back. Close

Within 24 hours of his May 26 inauguration, Indian Prime Minister Narendra Modi created... Read More

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Photographer: Raj K Raj/Hindustan Times via Getty Images

Within 24 hours of his May 26 inauguration, Indian Prime Minister Narendra Modi created an investigative team of former judges and current regulators to find the missing cash and bring it back.

India’s new Prime Minister Narendra Modi didn’t waste much time: Among his first acts on his first day in office was to make it a priority to recover billions of dollars stashed overseas to avoid taxes.

Within 24 hours of his May 26 inauguration, Modi created an investigative team of former judges and current regulators to find the concealed assets, known as black money, and bring them back. At stake is what’s estimated to be as much as $2 trillion, more than India’s annual gross domestic product.

“It will send out a loud and clear signal to all tax evaders,” said Arun Kumar, author of “The Black Economy in India” and an economics professor at Jawaharlal Nehru University in New Delhi, who calculated the $2 trillion figure. “There was always a lack of political willpower, and I hope it will be different this time.”

India is joining countries including the U.S. and Britain in cracking down on rich people who haven’t reported offshore funds. The nation ranked third in the world for money illegally moved overseas in 2011, behind China and Russia, according to a 2013 report by Global Financial Integrity, a Washington-based group researching cross-border money transfers. High-net-worth individuals and private companies are the “primary drivers of illicit flows,” the group said in a 2010 report.

India will proactively engage with overseas governments to hunt black money, President Pranab Mukherjee told lawmakers today while outlining goals of the two-week-old government, which is also seeking to stimulate economic growth, curb inflation, simplify investment rules and abolish obsolete laws.

Lost Taxes

Asia’s third-largest economy loses an estimated 60 trillion rupees ($1 trillion) each year from its formal sector, such as banks, and almost 6 trillion rupees of that is moved out of the country, according to Kumar, who analyzed independent studies and World Bank and International Monetary Fund data on trade flows. His $2 trillion estimate is the total amount Indians currently have stashed abroad illegally, without paying taxes in the South Asian nation or disclosing the funds to authorities.

Tax revenue on those assets could exceed $600 billion, based on a 30 percent rate plus penalties, Kumar said. That’s six times the amount the federal government estimates it will need to borrow this year to meet expenses. India’s (INGDPY) fiscal deficit will widen this year to the highest among BRIC countries -- Brazil, Russia, India and China -- in part because taxes as a proportion of GDP are low, a May 29 IMF estimate showed.

Black Money

Estimates about the amount of black money vary widely. Indians had moved $644 billion to tax havens as of 2011, according to data from Global Financial Integrity. Modi’s Bharatiya Janata Party said in a 2011 report that Indians had $250 billion, or 20 percent of the previous year’s gross domestic product, hiding in Switzerland alone.

The government defines black money as assets that haven’t been reported to authorities at the time of their generation or disclosed at any point during their possession. A large portion is converted into gold and held in households domestically. It’s legal for Indian residents to hold money in foreign bank accounts as long as they disclose it and pay taxes.

Modi’s special investigative team, set up to comply with a Supreme Court directive, will focus on the black money held in offshore accounts.

“The black money within the country is more easy to get at than that stashed abroad,” Kumar said. “Probing money moved abroad is a rather convenient way of diverting public attention from addressing the larger issue of unaccounted money within the country.”

Not Easy

Getting the money back won’t be easy, according to Ashutosh Kumar Mishra, the New Delhi-based executive director of Transparency International India, a group that monitors corporate and political corruption.

India needs to raise the issue in international forums and put pressure on foreign banks to disclose information about those who are evading taxes through their branches, he said.

“The problem of black money cannot be solved in a day,” Mishra said. “Lack of proper implementation is what has derailed all well-intentioned announcements like this.”

The Congress party pledged to claw back funds held illicitly in offshore accounts in May 2009 after its victory in federal elections. In a Supreme Court filing that month in response to a petition from former Minister for Law and Justice Ram Jethmalani, the government said it had proposed a new tax agreement with Switzerland to improve the exchange of bank data.

Stolen Names

In June 2011, the government received information from French authorities about 700 Indians who had accounts at HSBC Holdings Plc’s Swiss branches. That data, along with details about more than 23,000 other HSBC clients, had been stolen from the bank by a former employee, the London-based lender said.

About 100 of the 700 people on the list accepted amnesty from India, avoiding criminal prosecution in exchange for repatriating the money and paying taxes, a government official with knowledge of the matter said in July 2012. The official declined to provide any names or say how much was recouped.

“HSBC does not condone tax evasion,” the bank said in an e-mailed response from New Delhi last week. “Individuals are responsible for their own tax affairs.”

Mario Tuor, a spokesman for Switzerland’s State Secretariat for International Financial Matters in Bern, said his government “can only cooperate within the framework of Swiss law, and it doesn’t allow cooperation based on stolen data.”

Switzerland, Liechtenstein and the British Virgin Islands were among tax havens where illegal funds were stashed, A.P. Singh, then director of India’s Central Bureau of Investigation, said in 2012. He said Indians were reported to be the largest depositors in Swiss banks, without providing details.

‘Piecemeal’ Efforts

The Indian government published a report in May 2012 called “White Paper on Black Money.” By then, the Supreme Court had weighed in with a July 2011 order for a team headed by a judge to take over efforts to retrieve money stashed overseas. Mukherjee, India’s president who was finance minister when the report was published, said the white paper was in part a response to criticism that attempts to recoup black money had been “piecemeal and inadequate.”

Jethmalani, 90, an independent Member of Parliament who had been part of the BJP, said the administration delayed setting up the panel.

“For two years, the Congress-led government stalled it,” Jethmalani said in a phone interview from London. “Why were they obstructing the recovery of black money?”

The previous government challenged the court ruling because it posed a “very fundamental, constitutional question” about the authority of the judiciary, Manish Tewari, a New Delhi-based Congress spokesman, said by phone. The BJP was elected while “the judicial processes played themselves out,” Tewari said. “There was no intent of delaying or foot-dragging.”

Fighting Evasion

In March, weeks before the election, then-Finance Minister Palaniappan Chidambaram, 68, said India had made repeated requests to the Swiss government regarding bank accounts of Indian residents and was rebuffed.

“Switzerland understands and shares India’s wish to fight tax evasion and is committed to complying with the relating international standards,” Siamak Rouhani, an official at the Swiss embassy in New Delhi, said last week in an e-mail.

The new investigative panel headed by M.B. Shah, a former judge in India’s top court, has yet to figure out its scope and methods, Shah said by phone on May 29 from Ahmedabad, his home city in western India. The panel held its first meeting on June 2 and decided on a “road map” for implementing the court order, according to a government statement.

‘All Eyewash’

“The few steps the previous Congress government had initiated was all eyewash,” said Bizay Sonkar Shastri, a spokesman for the BJP. “It’s a priority for us, and we will pursue it with all sincerity and seriousness.”

Unaccounted money “reduces the tax base and the ability of the government to tackle the fiscal deficit,” said Ashima Goyal, a member of a panel that advises the Reserve Bank of India on monetary policy. “This probe team is very timely. It can also draw upon international treaties drawn up for this.”

Some undisclosed money is moved out of the country through the global transfer system known as hawala, according to the white paper. The system is based on trust or family connections and can involve mispricing of goods, financial loopholes and hidden accounting procedures to deliver cash in one country and pick it up in another. Using hawala is illegal in India.

Shell companies set up in tax havens are used to route some of the cash back to India by investments in stock markets through participatory notes, foreign direct investments and other instruments, according to the white paper.

Tax Amnesty

Under a 1997 federal tax-amnesty plan, during a coalition administration, the government invited companies and citizens to pay a flat 30 percent tax on all previously undisclosed income. Those coming forward were given immunity from laws penalizing tax evaders. Income reported under the plan, the sixth since 1951, totaled about 330 billion rupees, according to a Finance Ministry statement at the time.

BJP’s campaign promises to track down black money in cooperation with foreign governments mean that Modi, 63, needs to back words with action, said Nick Paulson-Ellis, co-head of global emerging markets at Banco Espirito Santo SA in London.

“This is a particularly good time to collaborate with international agencies chasing unaccounted cash,” said Paulson-Ellis, who used to run the bank’s India business. “Private banking systems are being exposed and forced to share client details with U.K., U.S., EU and Swiss authorities. If India can be a part of that dialog, it will get better access to information than was possible historically.”

To contact the reporters on this story: Anto Antony in Mumbai at aantony1@bloomberg.net; Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net Sheridan Prasso, Robert Friedman

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