A concrete outcome from the recent meeting of finance ministers and central bankers of G20 countries in Cairns, Australia, was an agreement on the automatic exchange of tax information. Such an arrangement has been championed by India during the past few years and its acceptance by the group is a testament to a persistent commitment to what was generally seen as an unfashionable issue by most countries. Formulated by the Organisation for Economic Co-operation and Development (OECD), the Common Reporting Standard visualises a two-step process. At the individual country level, there will be regulatory mandates for disclosure of information by financial intermediaries about transactions and earnings by their clients. Between countries, this information can then be shared, on a reciprocal basis, allowing each one to track the financial conduct of its citizens. The arrangement is scheduled to be put in place by 2017. Importantly, while the G20 provided the forum in which agreement on this was reached, it will include the entire OECD group, which should cover an overwhelming proportion of global finance.
Against the backdrop of intense domestic debate on tax evasion, funds being illegally stashed abroad and the apparent barriers to disclosure, this agreement is of enormous significance to India. Prior to this, the government typically pleaded helplessness when it was asked to reveal the names of people benefiting from this process, citing banking secrecy laws. This has allowed the debate to be dominated by rather alarming claims about the amounts involved, without the firm factual basis that a fully transparent arrangement would provide. Once the system is in place, the government will be obliged to use the reciprocity provisions to seek such information, notwithstanding the inevitable pressure from people who want to avoid exposure. Further, a much more precise estimate of the extent of the problem can be made, based on which appropriate policy responses can be considered.
The benefits to India and other countries apart, there is a larger significance to this agreement. It must count among the relatively few concrete achievements that the G20 has shown over the past few years. As a group, it undoubtedly played a critical part in shaping a collective response to the global financial crisis. The mix of fiscal and monetary initiatives and, very importantly, the agreement not to give in to protectionist temptations helped to avert what could have been a disastrous collapse. However, after that success, the group struggled to find a new purpose and mission beyond just keeping lines of communication between its members open. Stress lines emerged around the United States Federal Reserve's quantitative easing, Europe's sluggish response to the sovereign-debt crisis in Greece, the reform of international financial institutions and other issues, even as the group strove for collective action on a host of structural issues, such as climate change and financial inclusion. In doing so, it demonstrated that its reach was much farther than its grasp. The agreement on sharing of financial information is a distinct and welcome break from its trend. The G20 is most likely to remain relevant and effective if it shifts focus from big issues, for which there are already fora in place, to the kind of co-operation on nitty-gritty matters, whose benefits may be small but are tangible and quickly achievable.
