Taxation of Indian overseas wealth

It has long been known that very wealthy people are able to move their assets overseas and hide them in tax havens and other jurisdictions. This happens for a variety of reasons: to hide illegally obtained assets, to avoid taxation, to protect themselves against currency depreciation and to generally safeguard their bets with respect to the eventual economic situation in India. Much of this information, however, has been based on anecdotal evidence or accidental data leaks, such as those from the Panama Papers.

Now, however, we finally have a more systematic attempt to measure and assess the scale of such illicit financial flows, thanks to important research by the European Tax Observatory. The just released Global Tax Evasion Report 2024 is based on an extensive international research collaboration drawing on the work of more than 100 researchers from around the world. It provides a wealth of information and estimates at the global, regional and national levels, based on new methodologies that make it possible to make annual estimates of such illicit financial flows.

This is made possible by the availability of new data from some of the positive policy initiatives of recent years, from the offshore status of households (on the exchange of banking information) and from the activities of multinational companies (on country reporting of sales and profits).

The report contains important findings at the global level. The total amount of offshore financial assets of individuals has decreased due to the exchange of banking information, allowing countries that have information and wish to do so to deal with such offshore assets. The unconfirmed share of offshore financial assets has fallen from an estimated 90-95 percent in 2007-2008 to 30-40 percent today.

New forms of offshore assets, such as real estate, are emerging. In addition, corporate tax avoidance through inter-subsidiary pricing to shift profits to countries with low or zero tax rates continues and has even increased significantly in recent years, despite a relatively weak OECD effort in this direction.

We will, however, focus on what the report on financial assets held by Indians abroad reports. Graph 1 provides estimates of total offshore assets held by Indian residents in some of the major tax havens. This is calculated using a methodology developed by French economist Gabriel Zucman (co-author of this report) that exploits anomalies in international investment positions across countries.

It turns out that Switzerland is not really an important final destination; rather, it is probably more of an intermediary for holding financial assets elsewhere.

The question of course arises that since India is part of the automatic exchange of banking information system, the pattern of flows, their final destination and the owners of these assets, should be known to the Indian tax authorities. So why isn't more action being taken to trace, verify the owners and, at the very least, force them to pay taxes at least on the income from these assets? "

Organizations that are now embroiled in numerous cases against political opposition members and those disgruntled with the present government would do well to directly investigate such financial assets held overseas, which is in fact hurting India's economy.

In addition, a significant portion of offshore assets are now predominantly real estate. Researchers looked at places that actually have real estate ownership data. Graph 2 describes the results for asset owners from India, with Dubai standing out as the top destination for such assets, followed by Singapore and London by some margin.

The one area where the Indian government seems to be slightly more effective is in reducing tax evasion by multinational companies, which seems to have declined since 2015, possibly due to the introduction of a turnover tax on sales of global digital companies (Graph 3). However, the importance of non-EU tax havens in profit redistribution remains high.

Another reason may be the lower tax rate for corporations domestically, so that companies have less reason to shift their profits abroad.

Graph 4 shows that the effective tax rate for corporations fell from 13 percent in 2014 to 11 percent in 2020, while the effective tax on labor income rose from 3 percent to 5 percent. Unfortunately, in a country with such high inequality of income and assets, the tax regime is becoming increasingly regressive.

It is also becoming increasingly possible for the very wealthy to own assets domestically without paying taxes, using various loopholes and due to insufficient requirements to disclose actual ownership of offshore companies and funds.

The report identifies many strategies at the national and international level to address these problems. But obviously such policies can only be implemented with the political will to do so. We have to see if the government of India will actually take action against such tax evasion by rich people rather than just talking about it.