Credit Suisse estimates global households’ wealth. According to their estimates, the global wealth rose by $28.7 trillion to reach $418.3 trillion in 2020. India’s household wealth was estimated at $12.8 trillion, growing eight-fold between 2000 and 2020.
There is massive inequality in distribution of wealth in India. While India has more than 150 million people living below the poverty line with practically no assets or wealth, Credit Suisse estimated that there were about 7 lakh dollar millionaires in 2020.
To put income and wealth in perspective, India’s household wealth is more than four times its GDP of around $3 trillion.
Wealth — real estate, financial assets and business investments — represent economic power and earned income. Most households, however, earn income by using their labour. Small proportion of wealthy households earn most of their income from their wealth.
Government Taxes Wealth With a Soft-Touch
The wealth and income taxation policy in India is quite flawed. The government taxes labour incomes (salaries) quite heavily but reserves a kid-glove treatment for taxation of wealth and income therefrom.
Considerable wealth is acquired in inheritance, which in many countries is by levy of estate duty. India has no estate duty to tax the inherited wealth. India also has no wealth tax to tax the wealth — whether financial or real estate. Indian states do levy a small property tax in urban areas (albeit with consideration exemptions) and stamp duty at the time of sales and purchase.
The haves, while they pay no wealth tax or estate duty, also do not want to pay taxes on the incomes that the wealth generates. The capital gains on real estate and financial investments are quite low in India.
Realising the ill-consequences of the secrecy in the banking system (remember Swiss banks), international cooperation for exchanging banking and tax information began in 2012 and considerable ground for automatic exchange of information has been covered till now.
Over 100 countries exchanged important tax and bank account information in 2020. In 2016, the Multilateral Convention to implement tax treaty-related measures to prevent base erosion and profit-shifting was also signed by more than 100 countries.
There has also been good progress in making tax havens compliant with the international taxation system and not remain tax avoidance places.
These efforts have helped in tracing incomes and profit transfers, but are not as successful for wealth hidden abroad. The attempt in Pandora Papers disclosures is to uncover such wealth stashed abroad.
Pandora Papers Reveal the Wealth Stashed Off-Shore
The International Consortium of Investigative Journalists (ICIJ), a Washington -based non-profit organisation, of 280 “best investigative reporters from more than 100 countries and territories” literally opened a big Pandora’s Box when it released its first report on Pandora Papers on 3 October, titled ‘Offshore Havens and Hidden Riches of World Leaders and Billionaires Exposed in Unprecedented Leak’ on its website. The ICIJ collaborated with more than 600 journalists from 150 news outlets globally to put together the Pandora Papers. From India, nine journalists from the Indian Express group participated in this effort. The ICIJ had released investigative reports earlier as well — the Panama Papers in 2016 and the Paradise Papers in 2017.
In this first report based on Pandora Papers, the ICIJ has claimed that it could uncover the financial secrets of 35 current and former world leaders, more than 330 politicians and public officials in 91 countries, and also many “fugitives, con artists and murderers”. There are thousands of individuals who figure in the Pandora Papers, which includes over 380 Indians as well.
The Pandora Papers revelations are primarily about wealthy residents creating legal structures offshore to hold their assets in those jurisdictions for their own or their families’ benefit. These structures are created primarily for two purposes — keeping the assets away in more secure and secretive places and avoiding tax on the wealth and income therefrom.
Some of these structures have been created as companies. But the most common mode of holding these assets abroad is in the form of trusts.
The Pandora Papers investigations have unearthed thousands of such structures from papers leaked from 12 major international firms specialising in creating such trusts and other structures for holding wealth off-shore, mostly in tax-avoidance jurisdictions.
These structures holding the wealth may be legal or illegal depending on the laws applicable to the creators of these trusts and the wealth transferred to such trusts, which would have to be examined on the merit and facts of each case.
Indian Response to Pandora Papers
Besides the applicable tax laws, India enacted Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, to deal with the problem of black money, which is defined as undisclosed foreign income and assets of a beneficial owner who cannot explain the source of such investment.
The Indian Trust Act permits the creation of offshore trusts by resident Indians and also resident Indians to be beneficiaries of offshore trusts created by non-residents. Therefore, the creation of offshore trusts or being a beneficiary of such trusts disclosed does not automatically imply any wrongdoing, unless such a Trust violated any Indian law, including tax laws and the black money law.
The Government of India issued a Press Note on 4 October taking note of Pandora Papers and vowed to get these investigated by “relevant investigative agencies” and to take appropriate action as per law. A multi-agency group has been established to monitor the investigation.
For the disclosures made in the Panama and Paradise Papers, the government informed that undisclosed credits of ₹20,352 crores had been detected thus far. But the government did not disclose the final outcome — did these undisclosed credits lead to any final assessments? If so, what amount of tax was collected? Or, were the undisclosed credits explained by the people concerned leading to no action?
The same fate probably awaits the disclosures being made as part of Pandora Papers.
(The author is an economy, finance and fiscal policy strategist, and former finance and economic affairs secretary, Government of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)