How black money comes back to India via Mauritius

The contrast was striking. After months of having been on the defensive over his government's inability to effectively combat black money, Finance Minister Pranab Mukherjee, for once, had his questioners squirming.

The difference was that he was dealing with an international audience. A team from the Organisation for Economic Co-operation and Development, or OECD, led by its secretary general Angel Gurria, in New Delhi to attend a tax conference, was put on the back foot when Mukherjee said slow international progress in dismantling banking secrecy laws hindered India's attempt to uncover money siphoned out of the country.
"It is a real impediment in many cases," agreed Gurr'ia. The unravelling of secrecy laws remains a distant prospect, putting many who may have siphoned out money out of the reach of Indian authorities.


Domestic discomfort
The OECD may have been easy to convince. But within India scepticism abounds about not just Mukherjee's own determination to tackle black money, but also the entire political class's attitude to it.

Over the past two years, driven by the US fighting terror funding, the world has moved towards gradually dismantling banking secrecy laws and opening tax havens to scrutiny. India rode this bandwagon to renegotiate tax treaties with partner countries, and also to sign fresh agreements to exchange information with tax havens such as the Cayman Islands in the Caribbean.

Durgesh Shankar, a former member of the CBDT says it is impossible to put a figure on black money

But these developments may be ineffective unless they are complemented by reforms at home. Agreements with some tax havens, for instance, come replete with safeguards that require investigations within India to generate credible evidence before any information is forthcoming.

According to Mukesh Butani, Chairman, BMR Advisors, a services organisation providing tax advisory, the recent agreements assume a level of sophistication in understanding of the laws among tax officials that may not yet exist. "We don't have a gameplan in mind," Butani says, pointing to the absence of a comprehensive approach.

Tax reforms, too, continue at a glacial pace and gloss over grey areas. Over the past four years, states have been negotiating with the Centre to design an architecture for the goods and services tax (GST), which aims to dismantle fiscal barriers and create a common market in India.

The direction of negotiations seems to suggest real estate is an irrelevant part of the economy, whereas it is a sector where black money is considered rampant.

"The unspoken rule is that you don't raise the issue for sectors like real estate and alcohol," says Satya Poddar, Partner at Ernst & Young, or E&Y. Poddar has advised some of the states in the negotiations and also been part of a panel commissioned by the Thirteenth Finance Commission to suggest a GST architecture.

In 2010, US-based not-for-profit organisation Global Financial Integrity, or GFI, estimated $213 billion or about Rs 9.58 trillion (1 trillion equals 100,000 crore) had been siphoned out of India over a 60-year period ended 2008.

Among the more conservative estimates (See: Staggering Sum), it nevertheless drew interesting conclusions. The economic liberalisation since 1991 may have increased the avenues to illegally take money out, but the money has not been entirely lost to the economy, the report says.

Raymond W. Baker, Director of GFI, points out that the money "round trips," or is laundered and brought back in the form of investments. And if there is one destination that is synonymous with the round trip, it is Mauritius, an island nation in the Indian Ocean that is the springboard for much of the capital inflows into India.