India’s Transparency Reforms to Curb Illicit Financial Flows

by Neeti Biyani, Centre for Budget and Governance Accountability (CBGA), New Delhi

Domestic resource mobilization is crucial for a state to finance development, provide social security and redistribute wealth. The Sustainable Development Goals (SDGs) regard domestic revenue as fundamental for countries to meet their developmental goals. However, the shadow financial system is increasingly limiting the ability of governments to raise revenue on their own. Whether it is through anonymous companies or because of limited capacity of national tax authorities, illicit financial flows (IFFs) have explicit detrimental effects on financing of sustainable development.

IFFs are funds that are illegally earned, transferred and/or utilized. The majority of all IFFs however, result from cross-border tax-related transactions that exploit legal loopholes, including tax avoidance schemes. Developing countries lost $1.1 trillion to IFFs in 2013 alone, and $7.85 trillion between 2004 and 2013. On the other hand, net official development assistance from countries of the Development Assistance Committee stood at $142.6 billion in 2016. It’s not just developing countries that are faced with cross border taxation, as it also happens between Canada and The United States of America. The only difference is that the latter countries are able to contact a cross-border tax expert to help them, as well as being able to look at this website, ( for any help that they may need to get this problem resolved.

The Financing for Development process has committed to ‘redouble efforts to substantially reduce illicit financial flows by 2030, with a view of eventually eliminating them’. States have also pledged to significantly reduce IFFs by 2030, as envisioned in Goal 16.4 of the SDGs.

IFFs, or black money as the issue is known in India, are systematic and systemic. The most common ways in which IFFs are generated in the country include out of book transactions, manipulating books of accounts, misinvoicing trade receipts and transfer mispricing. IFFs in India are most often found in circulation in land and real estate deals, bullion, financial market transactions and public procurement.

There have been several estimates to determine the size of India’s black economy with respect to the country’s GDP – ranging from Nicholas Kaldor’s estimate of 4.5% in 1956, India’s National Institute of Public Finance and Policy pegging it at 18-21% in 1985, to Arun Kumar’s most recent assessment of 62%. India has also seen illicit outflows from the country, with capital flight from India being evaluated at $28.6 billion between 1971-86, to India losing an estimated $510 billion to IFFs between 2004-13.

Methodologies employed to arrive at these estimates however, cannot accurately calculate trade manipulation in services, proceeds from crime, hawala (an informal value transfer system facilitated by a trusted network of money brokers) and round tripping (money flowing out of the country and returning in the garb of foreign capital to benefit from tax incentives offered to foreign investment). FDI statistics for India reveal the significance of round tripping – between April 2000 and March 2011, FDI from Mauritius stood at 41.8% and from Singapore at 9.17% of the total FDI received by India. Considering the size of the economies of Mauritius and Singapore, it is perhaps safe to assume that these countries were not the source of such huge amounts of FDI flowing to India, and that investments were routed through these jurisdictions for tax avoidance and financial secrecy.

IFFs are a complicated and multi-faceted issue, and need several nuanced measures to curb them. India has adopted and supported a few transparency reforms to further global financial transparency:

Automatic Exchange of Financial Account Information between Jurisdictions: India signed up to the standard of Automatic Exchange of Information in June 2015. The OECD and the G20 have designed this standard to allow exchange of financial account information automatically, at regular intervals with the account holder’s home country – which will allow countries to have access to their overseas citizens’ financial account information. India will start exchanging information with other countries starting September 2017.

Registry of Beneficial Ownership of Companies: Anonymously owned companies facilitate embezzlement and secrecy. In 2016, India introduced a provision for creating a registry of true human owners, requiring all companies to report their ‘significant beneficial owners’. The provision is currently being debated in Parliament.

Country-by-Country Reporting (CbCR) of Multi-National Corporations’ Operation and Tax Data: There is a lack of transparent information about the operation of MNCs – they operate in various countries but report their operational and tax data as a consolidated entity in the jurisdiction where they are registered. OECD’s Base Erosion and Profit Shifting project (designed to equip governments with domestic and international instruments to check tax avoidance) requires MNCs with annual consolidated revenue of over 750 million Euros to report their operational information in a disaggregated, country-by-country basis. India announced the adoption of CbCR requirements for MNCs in 2016, which will ensure big corporations operational in India to report their data to Indian authorities.

Supporting a Global Tax Body: International tax standards are currently shaped by the G20 and OECD – both of which are clubs of rich, elite countries. Most developing countries therefore, do not shape these norms that affect them directly. Since 2011, India has been vocal in its support for the establishment of a global, democratic, intergovernmental tax body under the auspices of the UN, maintaining that it would be “crucial for the effective implementation of the 2030 agenda”.

Curbing IFFs and achieving a global financial system that works for everyone is crucial towards financing sustainable development. However, to check the generation of IFFs, India needs to make concerted efforts towards adequately staffing and enhancing the capacity of its taxation as well as customs departments. The fight against this systemic issue requires coordination among countries at regional and global levels, and countries should join forces on an equal footing to address the generation and corrosive impacts of illicit financial flows.

This post is part of the “SDG Solutions” series hosted by the United Nations Foundation, Global Daily, and +SocialGood to raise awareness of ways the international community can advance, and is advancing, progress on the Sustainable Development Goals. As the international community prepares to gather at the UN for the High-Level Political Forum on Sustainable Development from July 10-19, this series will share ideas and examples of action. Previous posts in the series can be found here.

Southern Voice on Post-MDG International Development Goals (Southern Voice) is a network of 49 thinks tanks from Africa, Asia and Latin America, which serves as an open platform to make contributions to the Sustainable Development Goals.

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