CUTS IN MEDIA-September 2009


Nothing Plastic: Cut misuse of your lost credit card
Economic Times, September 20, 2009

The Swiss Connection
The Financial Express, September 20, 2009

India has more control over corruption: World Bank
The Hindu, September 12, 2009

Sub-Regional taskforce submits memorandum to PM
Newkerala, September 09, 2009

WTO: Govt dissatisfied with process
Kenya Broadcasting Corporation, September 08, 2009

Memorandum on Indo-Bangla trade submitted to Indian PM
BSS News Bangladesh, September 08, 2009


The Swiss Connection
The Financial Express, September 20, 2009

You don’t have to be a millionaire to open a Swiss bank account! It takes just 5,000 Swiss francs, that’s what and swiss-bank-accounts. com claim. But given the stakes involved, it’s been quite a cat and mouse game for the world to unearth this Swiss effect and for India it’s been no different. With an alleged $500 billion to $1.4 trillion Indian money parked in the ‘Swiss tax havens’ and the continued denial by the Swiss authorities that the money “simply does not exist,” the paradox is evident.

Even as experts mull over how these figures are ascertained, there is no denying the fact that money is siphoned off to Switzerland and other tax havens not just from the developing countries but from world over. Uri Dadush, Director, International Economics Programme, Carnegie Endowment for International Peace, Washington DC, points outs, “We have to take these figures with a pinch of salt, however it is true that more often than not money is siphoned off and declarations not made. But, the bottom-line is, it is impossible to know the amount unless you have a very strong reporting system in place. There is a discrepancy in the Balance of Payments but the data is not always accurate, as the flow of money is not picked up precisely and there is a possibility of the missing data.”

Given that capital flight has complex forms, experts point out that it is important to demarcate between the legal (licit) and illegal (illicit) forms of flight. Licit flight capital is calculated as portfolio investment and other short term investments in the country but excludes longer term investments and foreign direct investment. Legal capital has a record in the books of the entities involved, earnings from interest, dividend, and realised capital gains normally returned to the country of origin. Illicit capital flight disappears from the books of accounts of the entities involved and any earnings from the capital are not recorded in the books of the country of origin.

DR Agarwal, Director, Institute of International Trade, Kolkata affirms, “The cross-border component of bribery and theft by government officials is the smallest, accounting for only about 3% of the global total. The criminal component constitutes about 30 to 35% of the total. And the commercially tax-evading component, driven primarily by falsified pricing in imports and exports, is by far the largest, at 60 to 65% of the global total.”

Illicit funds that move through world financial systems pass through an intricate process which involves placement, layering and integration. As Agarwal explains, “In the first stage the hard currency generated through the sale of drugs, firearms, prostitution, or human trafficking etc, or for sheer tax evasion, is deposited in an institution or business. Expensive property or assets may also be bought. In the second stage, the illegally obtained assets or funds are separated from their original source. This is achieved by creating multiple layers of transactions, by moving the illicit funds between accounts, between businesses, and by buying and selling of assets locally and internationally until the source of the money is virtually untraceable. Thus, the originator’s anonymity is achieved. After this in the integration stage, the funds are reintroduced into the financial system, as payment for services rendered, which makes the funds resemble legally obtained wealth.”

Monica Singhania, Associate Professor, Faculty of Management Studies, University of Delhi, shares, “It is well documented that since1960s, the US has effectively created an integrated global financial structure to facilitate the movement of illicit funds across borders. This parallel global financial structure is primarily assisted in its functioning by tax havens, now more than 85 in number. A large number of tax havens are secret jurisdictions, where business organisations can be set up behind the façade of nominees and trustees in such a manner that no one knows who the real owners and managers are. Such jurisdictions offer flexibility to nominees and trustees of disguised business organisations to exit from one secret location to another in the event that anyone comes seeking to find out who are the real owners of such businesses. Also anonymous trusts/ fake foundations and disguised companies are a party to it.”

Haven sent

Given that Switzerland is politically stable and ideologically neutral nation it has been a famous tax haven for generations due to its banking secrecy norms and attractive taxation rates for high net worth individuals. Reportedly, Swiss National Bank data from May revealed that Swiss banks held around 2.9 trillion Swiss francs in assets and 3.9 trillion francs in custody accounts including 1.1 trillion francs held for private clients. The popularity of Swiss banks continues to increase as countries around the world seek to impose even higher rates of taxation on their citizens. Since the UK announced that it would be levying 50% tax on those who earn over £150,000 from April next year, there has apparently been a marked increase in the number of wealthy Britons seeking taxation refuge in Switzerland.

However, the pinch of the loss is more for the developing countries who are deprived of the much needed tax revenue. Siddhartha Mitra, Head, CUTS Centre for International Trade, Economics & Environment, Jaipur, avers, “This outflow of $1.4tn exceeds the entire annual gross national product of India. It has denied the government of approximately $0.4 trillion of tax revenues which could have been used to reduce our physical and social infrastructure deficit. Moreover, the flow of such a large amount of money within the Indian economy would have generated large multipliers for employment and incomes.”

Statistics available on Union Finance Ministry website on the country-wise approvals for Direct Investments in JVs and wholly-owned subsidiaries during 1996-2007 reveal that more than one-third of outflows out of a total of around $31,000 million is to well known tax havens like Channel Island ($5,400 million), Mauritius ($2,600 mn), Virgin Islands ($1,008 mn), Cyprus ($1,361 mn) and Cayman Islands ($104 mn). Agarwal questions, “Indian businessmen, howsoever capable, cannot think of investing $5,400 mn or around Rs 21,000 crore in Channel Island. Data is not available for FIIs, not even in terms of who are the corresponding investors.”

Tracking tax

Given that tax havens are a reality of today’s globalised economic and business landscape, Manoj Vohra, Director Research and Senior Editor, Economist Intelligence Unit, shares there are two sides to them. “They can promote tax competition, driving governments towards better tax policy. On the other hand, if abused and opaquely regulated, tax havens can cost the exchequer vast sums of money, forcing governments to keep tax rates high. Presently, the second argument seems more convincing. But it doesn’t make the first argument invalid!” Vohra further adds, “Tax structure minus abuse would result into transparent tax competitive regimes, which is healthy for a global, free-market economy.”

Sudhir Kapadia, Tax Partner, Ernst &Young says, “The proposed Direct Tax Code has stringent General Anti-Avoidance Rules (GAAR) where under any transaction entered with the sole objective of obtaining tax benefits can be termed as ‘impressible’ by tax authorities and these could be re-characterised to reflect their true commercial import. However, it’s important that provisions such as GAAR are applied more against tax evaders rather than genuine business transactions which may have resulted in legitimate tax savings.”

Kapadia adds, “The crux of the challenge is to gather robust data that will meet the standards of legal defence and complete the process of conclusively establishing tax evasion in a timely manner. A ‘National Information Registry’ should be established wherein all the current data generated within various agencies of government can be compared and gaps established to then nail down offenders. For example, importation data with customs, forex payment data with RBI, cash withdrawals data with banks, VAT data on various high value purchases etc. The investment which government will make in such an effort would be more than justified by increased tax revenues from tax evaders.”

Experts opine strong institutional mechanisms, international cooperation, uniform international regulatory system and transparency in the international financial transactions may help in stemming the cross-border transfer of illicit capital.

NK Jain, Secretary and CEO, The Institute of Company Secretaries of India, points out that the membership of Financial Action Task Force (FATF) would help India become part of international initiatives against money laundering. Jain advocates how the FATF is engaged in continuous and comprehensive efforts both to define policy and to promote the adoption of counter measures against money laundering. “It has made 40 + 9 recommendations to combat the problem. Adoption of these recommendations would help the international community in increasing transparency in the financial system. The Task Force on Financial Integrity and Economic Development has also developed a Five-Point Plan to increase transparency within the global financial system which addresses issues of trade mispricing, country-by-country reporting, beneficial ownership and automatic exchange of tax information.”

Kapadia suggests that India should enter into ‘tax information exchange’ agreements with key tax treaty partners like Switzerland wherein specific data on suspected tax evaders can be asked for and obtained by Indian Government. With the recent deal to disclose details of about 4,450 American clients of UBS to US authorities there have been similar demands from Indian quarters as well.

The G20 recently announced that it was ‘ready to use countermeasures against tax havens from March 2010.’ But Dadush is cautious, “Very few countries have the economic and political clout like the US to enable disclosing of such information. And the G20s call is not in the nature of a ‘binding agreement’. This is a long term process and will require a coordinated global effort.”

Given that Switzerland is reeling under tremendous pressure to enter into ‘exchange of information’ agreements in addition to ‘Double tax avoidance treaties’ India has all the more reason to push for them. The challenge, however, is that Switzerland remains just one among the many tax havens globally.

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India has more control over corruption: World Bank
The Hindu, September 12, 2009

The World Bank rates India better in aspects of accountability, control of corruption, rule of law and regulatory quality than China but the country lags behind the latter in the bank’s perception on political stability and effectiveness of government.

India is behind another rapidly growing developing nation, Brazil, as well in all aspects other than rule of law.

“I am happy to say that India has more control over corruption than China and the country has been steadily improving in all major aspects of good governance such as voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption,” said Guenter Heidenhof, Governance Adviser to World Bank, during his recent visit here.

Political corruption

He attributed the breakdowns in governance to political corruption, nepotism, weak institutions and lack of performance and low capacity use of available resources, both human and material.

Mr. Heidenhof was in Jaipur to make a thematic presentation on governance and accountability at a media workshop organised by CUTS International in partnership with the World Bank.

Offering what he called an “outside perspective” on governance in India, Mr. Heidenhof said the country fared better in most of the major aspects of good governance during the period between 1998 and 2006, while in some aspects it recorded a slight deterioration between 2006 and 2008. In accountability its position improved considerably on a scale of 100 in 2006 but remained static thereafter till 2008. In political stability there was a climb-down from the position it had in 1998 and 2006. What was pertinent was the fact that the country — in World Bank perception — remained below 25 in a percentile of 100 in political stability while China and Brazil hovered around 40.

Mr. Heidenhof, while not missing the improved effectiveness of the country’s governance, pointed out that after climbing up the graph during 1998-2006 to cross 55 points it went down marginally in 2008. In regulatory quality India registered a steady progress from its 1998 position while in rule of law it tumbled from 65 points in 1998 to 60 in 2006 to reach 55 in 2008. After faring well between 1998 and 2006 in control of corruption, the country went below the 50 mark in the latest year of reckoning.


Taking up the areas of education and health, the World Bank representative said teacher-doctor absenteeism continued to plague both sectors in India. Instances of teachers playing truant were maximum in Jharkhand (38-42 per cent) and Bihar and Punjab (34-38 per cent). In Uttar Pradesh, 26-30 per cent remained absent and in Rajasthan 22-26 per cent. The minimum teacher absenteeism was reported from Maharashtra (14.6 per cent), followed by Gujarat (17 per cent) and Madhya Pradesh (17.6) and 21.2 per cent each by Kerala and Himachal Pradesh.

In doctors’ absence Bihar topped while Jharkhand and Orissa were closely behind. These States along with Assam, Chhattisgarh and Punjab accounted for the highest percentage of medicos absenting themselves without giving any reason.

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