Sucheta Dalal :Tax evasion: Broken trail
Sucheta Dalal

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Tax evasion: Broken trail  

May 12, 2011

US is cracking down on Indian-Americans with undeclared Indian accounts. But these dubious tax-dodging accounts won’t go away, thanks to rampant corruption in our tax department and the impossibly high deposit targets for bank managers

Sucheta Dalal

In January this year, the US Internal Revenue Service (IRS) accused Vaibhav Dahake, an Indian-American, of dodging taxes by sending his savings to undeclared bank accounts in India. Specifically, based on Mr Dahake’s confession, IRS zeroed in on the Hongkong and Shanghai Banking Corporation (HSBC) and five of its employees for helping him to evade taxes. The IRS has now followed up the confession by seeking a court order to ensure that HSBC gives it a list of all Indian-Americans who have more than $10,000 in NRI bank accounts in India.

According to media reports, the IRS believes there are “9,000 high net worth Indian US residents who maintain at least $100,000 in their bank accounts in HSBC India but only 1,921 of them have disclosed details of their accounts.” The IRS reportedly told a US court that HSBC has been actively soliciting clients of Indian origin through its ‘NRI Services Division’ since 2002. It is also looking at as many as 18,000 accounts on suspicion of tax dodging. What makes the situation tough for HSBC is that Mr Dahake and others under investigation have reportedly told the IRS that the Bank had ‘assured’ them that it would not report the income earned on Indian deposits to the US authorities.

More importantly, bankers believe that the US is planning to pressure HSBC, exactly as it did with UBS, where its investigation into tax evasion forced the Swiss bank to abandon its famous guarantee of secrecy and reveal names of 5,000 American clients to the authorities and pay $780 million in settlement. It means that the IRS could expand its investigation to other Asian and European banks to track American tax-dodgers.

Isn’t it interesting then, that the action has found just an innocuous mention in most leading newspapers? Is the action not newsworthy? Not really. It is fairly common knowledge that thousands of Indians, who have migrated and acquired foreign citizenship, continue to maintain assets and bank accounts in India. Nobody is really surprised at foreign banks helping Indians dodge taxes by parking them in Indian accounts, just as they help Indians park their tax-evaded money in overseas tax havens. If foreign banks, through their private banking, offer a full complement of services, including investment advice, legal documentation and creation of multiple overseas corporate structures/shell companies to obfuscate money trails in hawala transactions, why wouldn’t they offer the same to those looking for the reverse trip? These are two sides of the same coin, except that the tax-evaded money going out of India is significantly larger than the relatively puny business of helping overseas Indians to salt away some money here.

Some commentators were surprised at the US expanding its action with a ‘John Doe’ filing, because India is not a tax haven. But consider the temptations for Indians living overseas. The exchange rate always works in their favour when they visit India, in terms of purchasing power parity. For income earned in low-interest-low-inflation regimes, India’s high interest rate is also a big bonanza; the exchange rate is a risk, but not a big one when the Reserve Bank of India (RBI) ensures tight control over the rupee. Add to this is the fact that many Indians acquire foreign citizenship only for economic security and find it difficult to cut their bonds with the home country. A stash of money in India that is steadily earning high returns (relative to their home countries) as well as an apartment or property in India is a kind of security blanket.

If, in this scenario, a banker dangles another carrot and offers not to tell the IRS about their domestic accounts, then the temptation must be huge. However, not all foreign citizens of Indian origin bank with foreign banks. Many, who have migrated to Canada, Australia and New Zealand as adults (Vaibhav Dahake became an American citizen only in 2006), have not closed their domestic accounts in national banks or even cooperative banks. While Mr Dahake transferred foreign earnings into domestic accounts, most others are smarter. The domestic account is usually topped up with Indian cousins or relatives paying them locally for the purchase of the latest gaming gizmo, or a nifty iPad/iPhone before its Indian launch, etc. This ensures a nice supply of spending money in India during their holidays and family visits. Sources say that lack of automation and lax government machinery helps, because many have not even surrendered PAN (permanent account number) cards and other domestic identity proof. Ironically, even the Unique Identification (UID) number will not help, because the UID is not applicable to Indian citizens, but resident Indians (a strange and questionable decision).

This happy scenario will, of course, end if the Tax Information Network (TIN) is used effectively to track all deposits exceeding Rs10,000. Today, the TIN data is used mainly in cases that come up for scrutiny. Also, without the active connivance of banks, it will be impossible for foreign citizens to open new bank accounts in India if the Know Your Customer (KYC) data is correctly scrutinised. However, rampant corruption in the tax department and the pressure on bank managers to meet impossibly high targets will always offer plenty of opportunities to continue to maintain dubious tax-dodging accounts. In HSBC’s case, the deposit was apparently canvassed through its two NRI cells in the US (which have been quickly shut down after the investigation began). This can only mean that Mr Dahake was lured through deliberate mis-selling.

The question then is: Will the US (or, for that matter, Canada, Australia and New Zealand) succeed in extracting their legitimate tax dues from Indians who have become citizens of those countries for economic benefit? It seems difficult. They will need to pressure the Indian government to get domestic banks to part with the information—definitely for banks that did not actively canvass tax-evasion through NRI deposits. It is hard to imagine that such cooperation will be anything more than lip-service, given the rampant corruption in India. Has our government ensured that its citizens pay taxes correctly? The number of taxpayers in India is laughable compared to the spending patterns in urban India. Our enforcement agencies allow massive malls selling only ‘smuggled goods’ to operate openly without any action; citizens’ lament about the high cash component in realty has been ignored since Independence and jewellers dotting every part of India are not touched, although most of their business is in cash. After all, the biggest tax-evaders are our politicians and government officials who need cash to buy votes or appointments to ‘lucrative’ posts.

Also, it is hard to imagine that the US will get serious cooperation from the Indian government for tracking its relatively small pool of tax-evaded money sitting in Indian banks, when it is doing nothing to bring back billions of dollars of money stashed overseas by the richest Indian businessmen, politicians and bureaucrats. Even civil society, which is fighting corruption in India, will be more concerned about Indian money stashed in global tax havens. As for HSBC’s shady role in the US tax dodge—that is altogether another matter and is discussed elsewhere in this issue.

(This article was first published in the Moneylife magazine edition dated 5 May 2011.)

-- Sucheta Dalal