Our black money is here, not in Switzerland

Baba Ramdev’s financial naiveté is only to be expected. But i am astonished that the media endlessly repeats the myth that enormous hoards of black money are lying in Swiss banks.

Only financial illiterates will leave their money in Swiss banks offering very low interest rates (sometimes under 1%). To maximize their gains and hide their cash trail, savvy crooks route their money through various tax havens, and then seek the assistance of financial managers to maximize gains.

Financial managers will suggest a variety of assets from shares and bonds to real estate, aiming for annual returns of 10-20 %. When such high returns are available, only novices will leave their money in bank deposits with very low returns.

This is obvious from the details disclosed of Indian-owned accounts in the LGT Bank in Liechtenstein. Of the 26 Indian accounts unearthed , some were owned by NRIs, and only 18 looked taxable. These had received inflows of just Rs 39 crore over two years, some of which may have been legitimate earnings abroad. This suggests that even if the Swiss bank secrecy is broken, relatively modest sums may come to light.

The government is signing agreements with many countries to access more information on foreign bank accounts. The very signing will warn crooks to transfer their funds to chains of corporations in lightly taxed places ranging from Liechtenstein to Cayman Islands and Mauritius to Bermuda. Once laundered through a dozen corporations in a dozen tax havens, money becomes white.

Some businessmen may park large sums temporarily in Swiss banks pending better deployment. Some politicians may not yet be financial savvy and may be content keeping large sums in Swiss banks. These will be exceptional cases. The bulk of black money abroad is in financial assets across the globe.

Where exactly? Nobody knows. But one of the best places in which to invest money is India, not Switzerland or the US or any western destination. Housing prices in the US doubled after 2000 and that was called a bubble, but housing prices in India rose almost ten-fold. Declarations by politicians of their assets show a huge preference for real estate over all other assets.

The Dow Jones index in New York is barely higher today than in 2000, but the Bombay sensex is up six-fold. Interest rates on Indian government bonds are 8% against 3% in the US and Germany. Clearly India is one of the best investment destinations in the world. Income tax rates today are modest and there is no tax on dividends and capital gains. So, enormous sums of black money that once went abroad have returned in white form over the last two decades. These flows may have helped the Indian economy grow faster. They have certainly helped push up land and stock prices to dizzy heights, and election spending too.

India now gets $60 billion annually of remittances from NRIs, and up to $50 billion from portfolio inflows. A significant part of this must be black money returning as white. Some inflows come as NRI bank deposits in India. Lots of money comes through companies set up in low-tax havens like Mauritius with whom India has double taxation avoidance agreements , so the earnings of these companies in India constitute tax-free white money. Plugging the Mauritius loophole will not change matters much: the money will shift to other zero-tax havens, or low-tax havens like Holland.

But why focus on inflows from abroad? Income tax is paid in India by only 31 million people or 2.5% of the population. The number liable to pay tax must surely be ten times higher.

Within India, money moves seamlessly from black to white and black again. Real estate and stock market transactions include thousands of crores of black money every year, and experts can tell you how to convert white to black and back again. In rural areas, all transactions are in cash, even in multi-crore farm deals, and nobody pays income tax regardless of income.

Income tax officers are both corrupt and lacking in investigative skills, so there is little fear of being caught. Companies create hundreds of subsidiaries that create an impenetrable financial labyrinth. Enormous parts of the country are not within 50 km of an income tax office.

There is no space in this column to list all possible ways of finding that black money. But if Ramdev, Anna Hazare and the government are serious about tracing black money, looking for it in Swiss banks cannot be a high priority. They need to look first and foremost within India. Most black money never leaves India, and much of that does come right back.

14 thoughts on “Our black money is here, not in Switzerland”

  1. Dear Sir,

    this sentence came as a revelation for me

    Income tax is paid in India by only 31 million people or 2.5% of the population. The number liable to pay tax must surely be ten times higher.

    on one hand i am proud of being in the 2.5% while on the other it pains to know of the ‘able’ majority who refuse to share the burden of a poor country like ours.

  2. Babulal Singhania

    Dear Mr Iiyer
    Normally I follow your articals.This time I disagree with you. You have said majority of the money come back to India, and invested in real estates and share market. This helps indian economy.
    You are also quoting that in ten years, real estate
    prices doubled in USA, whereas in India it is ten times.
    You may call it growth, but I disagree. It is not in the interest of nation. Such economy is heading towards
    negative growth. It multiplies hoarders. Rich are getting
    richer anr poor are poorer. poor man can never dream of
    having own home.
    Futher you donot find any difference in motive of Baba
    Ramdeo and Mr Anna Hazare. Both issues are different
    and are equally serious. In your aricle you have supported
    black money as well as corruption.

  3. This is very true the black money is lying in India. It is a kind of thing which is visible and no body wants to see it. Black money is parading in full confidance on Indian malls, bollywood, stock market, channel, multi billion mergers, etc.

  4. Very right Mr. Swamy. Infact we should see the growth rate at which Trusts, NGO’s have been registered over the last decade. These NGO’s are quite safely converting black money into white not only of politicians, corporations but also of several other influential people.

  5. Babulal Singhania

    Dear Darshana
    I Tax payer 2.5 % of popuation is not discourging figure.
    I consider otherway. The below figures are based on
    certain assumptions.
    Population 120 crore.
    Consider 5 member family, thus maximum tax payer
    can be 40 crore.
    80 % family earns below Rs 1.3 lacs per annum.
    Remaining 20 % are 8 crore= 80 million.
    TDS is deducted from salaried people who does not
    have PAN no. TCS Tax collection at sorce is recently
    inroduced , who does not have PAN no.
    Thus TDS and TCS together may be be 5 million.
    In my opinion there is no need to increase no of tax
    payer. Schemes like Narega are to be scraped.
    80 % of such subsidies and tax goes into burocrates
    and politicians pockets.

  6. As long as money is in India, it is OK whether black or white and it will serve the economic development. The difference between black and white money is only payment of taxes to government for its expenses. If government is facing shortage of funds, it would jack up the tax rates to extract needed funds anyhow from its means of collection. There is also a big question that who is enjoying these government funds.

    As the requirement of government funds are reducing relative to total economy and government shedding unrelated responsibilities other than defense, home, foreign affairs, environment, social justice and science & technology, the tax collection should drastically reduce in future.

    The meaning of word ‘Excise’ is to ‘to cut’. Excise tax is imposed by colonial rulers to cut local production by making them costly to the purchaser / exporter. Is it required to cut production in this age by imposing taxes?

    Of late India is showing enormous financial strength compared other developed countries. Rupee (INR) is stable compared to Dollar/ Euro and the Indian interest rates are much higher. So naturally foreign money whether owned by Indians / others will flow to India to reap better appreciation of their investments. This is happening despite high inflation in India. That means, INR is kept undervalued by the policy makers to appease exporters lobby by building up foreign currency reserves. If INR is not allowed to find its true value, interest rates and inflation are bound to go up to compensate the artificial intervention.

    India should attract huge foreign funds by issuing treasury bonds (in INR) at attractive interest rates to finance its infrastructure and upgrade living standards of people. There is no need of building huge foreign exchange reserves when Indian industry, service sector and agriculture are showing better competitiveness compared to developed countries. China is building up huge FE reserves because it has already huge production base bigger than its local consumption lest it would face political turmoil’s. India need not repeat the mistakes of China which are done for political reasons.

  7. Quite true. India is much better option as compared to keeping money in western economy, in fact this high liquidity presence in the economic system could well be the very reason for all round high inflation in recent years.

  8. Yes, majority of the guys with black money are now running to get it converted into white. There are legal as well as illegal options. Some of the options which are perfectly safe do these conversions for as low as 10%. Being a consultant myself, I recommend people with black money to do this asap and avoid the financial burden when caught. I can assist with full secrecy and personal meetings.

  9. But Modi is reluctant to touch Income tax act at all, Dr Subramnayam swamy is keep trying to abolish income tax or modi fy income tax&excise to curb the route cause of black money

  10. I have millions of punds to invest in India and I am a patriot but the police – judiciary and no respect to a businessman in India is stopping me to do any thing in India, If and only the diplomatic status is granted to people like me and thousands of people living abroad will lift India to its heights within ten years. Security is the main issue, police behaviour on the second. Firearm licence is third. What nonsence that a rich man who wants to enjoy his life and can’t even smoke a cigarette in his own car in India, which harms no body else

  11. yes… Aptly pointed that Black Money is in India. Especially in the housing domain if you ask me. All the black money transactions are responsible for sky rocketting the housing prices in India. 10-fold iincrease in the last 10 yrs……..prices reaching min 1 crore in cities. hOW the hell is the Middle class Working population going to afford a home. Houses are only taken by people with abundant black money to invest…the demand never drops and the prices are always high. Regulatory policies are a must to stop all this. Right from land aquisition people want 30-40 % to be paid in black to evade tax. Stashed money abroad is only bought to India when rupee is weaker …making it more weaker and increasing the already prevalent debt in the nation.

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