The business of money in tax havens excites the imagination. One can conjure up loads of ill-gotten wealth being stashed away in some underground cellar, with the owner decked in diamonds and rolling on a bed of greenback.
Today's Indian Express has a story about 612 Indians who are among thousands with accounts in tax havens. It will make waves. Apart from our own 612 tax haveners, the story talks of 1.2 lakh offshore entities and trusts involving 170 countries.
The story, which has been done through the collaborative efforts of several global investigative journalists banded together under the banner of the International Consortium of Investigative Journalists (ICIJ), names 20 of the 612 Indians today. The most prominent names among them are Vijay Mallya (of Kingfisher infamy), Teja Raju (son of B Ramalinga Raju of Satyam ignominy) and Ravi Ruia (of Essar) - apart from a motley bunch with surnames such as Oswal, Modi (not you know who), Mittal (of Indiabulls), Mammen Mappillai (MRF) and Oswal (scion of the Ludhiana-based textile and chemicals group), among others. (See the full list here)
What we have to brace for is more disclosures in the coming days, which could be even more sensational - though that is still to be seen. At the very least, the Indian stock markets may be roiled with a new bout of concerns about who will get named tomorrow or the day after.
The Express says that the details of the tax haven transactions of Indians and other global mega-rich who like to keep their nest-eggs outside their home countries will dwarf the documentation of WikiLeaks. It says: "Details of these transactions were contained in 2.5 million secret files and accounted for more than 260 gigabytes of data. They were obtained by the International Consortium of Investigative Journalists (ICIJ) and their total size is more than 160 times larger than the leak of the US State Department documents by Wikileaks in 2010."
It adds: "The secret files provide facts and figures - cash transfers, incorporation dates, links between companies and individuals - that illustrate how financial secrecy has spread aggressively around the globe. They represent the biggest stockpile of inside information about the offshore system ever obtained by a media organisation."
In the coming days, the stuff will surely hit the fan as more big names are disclosed both in the Indian media and abroad. However, some cautionary notes need to be stated upfront.
First, and most obvious, the volume of documents accumulated, while important for an investigation on this scale, is less important that the value of the data they contain. Details of cash transfers, dates of incorporation, et al, are important pieces of evidence, but closing the loop between the persons named and the money trail will need much, much more investigation. It is worth recalling that even though the 2G scam is sure to have involved a lot of slush money, the money trail has more or less been lost.
Second, not all accounts and corporate presence in tax-havens may necessarily be in violation of the law. Many of the persons named - Ravi Ruia, for instance - are non-resident Indians (NRIs) who only have to be in compliance with the tax laws of their domicile countries. Disclosures to Indian entities may also have been made, but may not be known to the investigators. Indian companies and Indian residents who have to be in compliance with our laws - most of which lead to more harassment than legal convictions - may not have much to worry about.
Third, the moral argument against those with accounts/businesses in tax havens is that they may be evading domestic law and taxes. However, laws change all the time. It was once a crime to hold a single dollar in your wallet; today, you can do so without fear. Moreover, it may be part of a specific government policy to encourage inflows from tax havens. Take our own government: we have deliberately left open a loophole for companies to route their investments to India through Mauritius, and this is benefitting our stock markets, and also helps us in meeting our current account deficit.
Not only that, we have now specifically announced that the General Anti Avoidance Rules (GAAR), which Pranab Mukherjee introduced in the 2012 budget to deter ruses meant to evade tax, will not be implemented for three years. The message is simple: when we are in trouble on the external front, we will not look at the colour of the money.
Fourth, it goes without saying that capital will try to reside where it is taxed the least. A tax haven is not necessarily a shady place to park your money (though some of them surely are): it is merely about giving individuals and companies tax or other breaks and get them to invest there. Even today, countries have double-tax avoidance treaties, which enables companies to legitimately pay lower taxes in one country and avoid the higher tax rate in another country. Mauritius is famous because it has zero tax on certain types of incomes - and we have a double-tax treaty with that country. We have created a tax haven, not they.
Fifth, tax havens exist within India as well. When Narendra Modi offers the Tatas a tax credit for putting up the Nano factory in Gujarat, he is offering a sales tax haven for the project for some years. When Nitish Kumar demands special status for Bihar, he is essentially demanding that his state should become a tax haven for domestic and global investors in order to develop faster.
Not only that. Politicians create their own tax havens to favour their voters. Today, farmers pay absolutely no income tax whatsoever - so if you want to evade income tax legitimately, you could do worse than marrying into a farming family and show most of your income as derived from agriculture.
Seen in this perspective, tax havens are instruments through which states which would never have got capital are using the bait of tax advantage to develop themselves.
Look at the same picture globally, and this is what is happening. Switzerland, once the prime tax haven, is now becoming less of a haven under pressure from the US and neighbouring countries. This is what makes the British Virgin Islands, Cook Island etc more attractive now.
The only real way to avoid the flow of tax-evaded money across borders is to have similar tax rates and laws across the whole world. Which ain't going to happen.
This is not to say that businesses and individuals who move their wealth to tax havens are pure as the driven snow. They are crooks as defined by domestic laws. But not all of them can be tarred with the same brush.
Just as one man's terrorist is another man's freedom fighter, a tax haven is one country's red carpet for investors, and a red rag for taxmen in another.