The Curious Case Of Indian Funds In The Swiss Banks
BY RHEA LOUIS / JULY 24, 2021
This safe haven for many wealthy Indians, witnessed a sudden surge in Indian funds during the Covid-19 pandemic, alluding to black money stashed overseas.
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witzerland has one of the most stable and prosperous economies in the world with the role of the financial sector, the banking sphere in particular, being of utmost importance.When assessing the banks’ significance to the Swiss economy, they hold as much as USD 7,000 billion and one-third of all global offshore funds. The exclusive characteristic of the Swiss Banks is their unwavering commitment to classified transactions and client confidentiality and hence, they are always associated with an aura of secrecy.
When assessing the banks’ significance to the Swiss economy, they hold as much as USD 7000 billion and one-third of all global offshore funds.
The modern Swiss Banking system emerged during the global depression era in 1934, when France and Germany realised that some of Switzerland’s oldest banks had become a financial refuge for the rich aristocrats fleeing the French Revolution. With a view to prevent capital flight, they launched a search for tax funds that were allegedly stashed in Swiss accounts. Subsequently, in 1932, French authorities raided the Paris office of the Swiss Bank, Basler Handelsbanken, and uncovered assets worth approximately FRF 1 billion, allowing Germany to enact a law that made keeping foreign capital in Swiss Banks an offence punishable by death.
Credits: unknown via Google
They pressured Switzerland to divulge depositor information, but Switzerland refused to deviate from its long-held tradition of neutrality, strengthening their banking secrecy by passing a law in 1934, making the disclosure of such information a crime, and have been known to be holding on to secrets for over 300 years since then.
Historically, it has been observed that despite the negative interest rates offered by the Swiss Banks the rich in many countries prefer to park their money in Swiss accounts which means that instead of earning interest on money stored in their bank accounts, people pay banks to keep their money. This is a testament to not only the stability of the Swiss economy but also their undisputed privacy laws, making these banks a great choice for parking uninvested money. These negative interest rates enable one to pay lower consequent tax on their interest income and also evade the high taxes that they would be liable to pay if the money had been deposited in their nation. However, with an effort to be more transparent, in 2017, Switzerland decided to implement a global agreement aimed at preventing tax evasion across the world and in October 2020, details of around 3.1 million bank accounts held by foreigners had been revealed to their countries of origin or residence by the Swiss Federal Administration.
Pictured : Federal Palace of Switzerland via bern.com
According to recent reports, overall customer deposits in all Swiss Banks rose in 2020 to nearly CHF 2 trillion, which includes over CHF 600 billion in the form of foreign customer deposits. A substantial portion of these funds were from the United Kingdom, CHF 377 billion and the United States, CHF 152 billion. However, owing to the pandemic, UK, US and Bangladesh actually experienced a decline in their share of funds whereas the amount increased for India and almost doubled in the case of Pakistan to over CHF 642 million.
Indian funds in the Swiss Banks are said to have jumped to over CHF 2.5 billion in 2020, the highest in 13 years, from CHF 899 million in 2019 reversing a two-year declining trend.
Indian funds in the Swiss Banks are said to have jumped to over CHF 2.5 billion in 2020, the highest in 13 years, from CHF 899 million in 2019 reversing a two-year declining trend. Out of the total CHF 2.5 billion, over CHF 503.9 million were stored as customer deposits, CHF 383 million were stored via other banks, CHF 2 million were stored as Fiduciaries or trusts, and almost CHF 1,644.8 million were stored as bonds and securities. Annual data from Switzerland’s central bank also shows that, during this time period, the money held via other banks rose sharply from CHF 88 million to CHF 383 million. The biggest surge however, was in “other amounts due to customers” from India, which saw a sixfold increase towards the end of 2019, from CHF 253 million to CHF 1664.8 million, despite customer account deposits and fiduciaries or trusts declining. Citing this data, concerns about affluent Indians stashing black money overseas have been raised.
Since an automatic exchange of information regarding tax matters between India and Switzerland has been in force since 2018, it would be incorrect to say that all the money deposited by Indians in the Swiss Bank is black money. Under this framework, Indian tax authorities receive detailed information regarding all Indian residents having accounts with the Swiss Financial Institution. They have also actively shared data regarding accounts of Indians suspected of financial misconduct, after submission of prima facie evidence. In addition to this, the Indian government imposed the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act in 2015, with an aim to curb black money, or undisclosed foreign assets and income, and impose tax and penalty on such incomes.
Owing to these factors, the Finance Ministry of India has stated the possible reason for the increase in funds to be the rise in business transactions between the two countries, resulting in bigger deposits by Indian corporations in Switzerland and more business for Swiss Bank branches in India. Increase in interbank transactions, capital increase for a subsidiary of a Swiss company in India and rising liabilities connected with the outstanding derivative financial instruments could also be the reason for the surge in deposits.
Illustration by S. Kambayashi via The Economist
It has also been pointed out that some deposits in the Swiss Banks may also belong to Non-resident Indians (NRIs) who are not liable to pay taxes in India. Thus, a mere increase in financial asset holding in Swiss Banks alone is not sufficient to interpret it as the flow of tax evaded funds from India to Swiss Banks.
However, the data provided by the Swiss Government federal gazette regarding the names and initials of Indian account holders reveal that a large amount of them belong to those who have already been probed by the Tax Department and the Enforcement Directorate. The surge in Indian funds comes as a surprise particularly since it occurred during the COVID-19 pandemic, a virus that hit almost all sectors of business, household, industry and income. A report from the Centre for Monitoring Indian Economy (CMIE) revealed that during this time, the economy was so bad that even salaried jobs across India registered a sharp decline of 9.8 million. Amidst reports of a falling economy, how did the funds abroad rise by such a substantial amount?
An article from the Economic Times, “Black Money: Don't jump to Conclusions'', also points out how instead of chasing accounts of Indians that could well be legitimate, the government must take advantage of the Information Technology prowess to establish audit trails on financial transactions and assiduously mine the data generated by the Goods and Service Tax (GST) to track accounts evading tax.
Credits: unknown via DNA India
It is also necessary to conduct a more realistic project evaluation while sanctioning bank loans, for example when it comes to real estate transactions the transaction value shown by colonisers during registration is different from the actual market value enabling the seller to evade capital gain tax. The report also suggests arm's-length financing of projects through bonds and cleaning up political funding as key to stemming black money.
Since time immemorial, black money has been a particularly challenging concern for Indian lawmakers. Black money overseas implies a loss of significant revenue sources for the government and corroborates the notion regarding the rich getting richer in India when ordinary Indians tend to struggle. Although the numerous ways in which black money is generated make it hard for the government to track it down, several policies and proposals floated, while tough to implement, may go a long way towards reducing the severity of the issue.
Keywords
Swiss bank, French Revolution, neutrality, black money, NRI, Tax Department, Enforcement Directorate, Tax Act (2015)
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References
Press Trust of India. (2021, June 17). Indians' funds in Swiss banks climb to Rs 20,700 crore, highest in 13 years. India Today.
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Unnikrishnan, D. (n.d.). Explainer: Swiss Bank Accounts: What's Attracting The Rich To These Banks? Moneycontrol.
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Von Baldegg, K. C. M. (2012, February 1). A Film Noir Photo Essay on the Secretive World of Swiss Banks. The Atlantic.
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Koba, M. (2010, August 5). Swiss Bank Accounts: Separating Fact From Fiction. CNBC. https://www.cnbc.com/2008/08/20/swiss-bank-accounts-separating-fact-from-fiction.html.
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Prasad, G. C. (2021, June 19). No big chance of increase in black money flow to Swiss banks: finance ministry. Livemint.
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