What you don't learn at Harvard biz school

The paradise in the Paradise Papers refers to tax havens of low or even no taxation. Such havens usually are shadowy and sleazy little countries and principalities such as the Cayman Islands, Lichtenstein and Monaco, and sometimes entities within countries like Jersey, Guernsey, Bermuda in the UK and Delaware and Puerto Rico in the US. Then there are low taxation countries like Switzerland, Singapore and Dubai that assure secretive rich people of their privacy.

Essentially, a tax haven exists to cheat sovereign states of their lawful incomes. The Tax Justice Network campaign group estimates that corporate tax avoidance costs governments $500bn a year while personal tax avoidance costs $200bn a year. This, in effect, means that anywhere between $20-30 trillion of business transactions in various jurisdictions are sheltered from taxations. Moody’s estimated that in 2016, giant American technology companies such as Google, Microsoft and Apple were hoarding about $1.84 trillion cash in offshore havens. Clearly, they are avoiding taxes by bending the rules of the tax system. This is tax avoidance, which is not illegal for they are operating within the letter, but perhaps not the spirit of the law. Tax evasion is just plain concealment of income and is a crime in all countries.

In the early 1980’s, shaken up by the number of scandals in Wall Street, and by the number of its MBA graduates who were found wanting in ethical and moral values, the Harvard Business School made a course on “Leadership and Corporate Accountability” a core requirement. I am sure Jayant Sinha, a Harvard MBA, had to do this course. Such courses now are in the core curriculum of the business schools attended by the other two young politicians also named in the Paradise Papers or capers if you will. Sachin Pilot graduated from the famous Wharton School of Business and Karti Chidambaram took his business masters from Texas and a law degree from Cambridge to boot.

Doing the required ethics course is one thing but it is quite something else to be able to resolve the moral dilemmas of what John Kenneth Galbraith described as the “HBS’s ethical view of capitalism which derives straight out of the Protestant ethic and its transformational view of money, in which the ability to accumulate wealth is a reflection of one’s character.”

The charge against Sinha is that while acting as an Omidyar Network representative, he was on the board of a California company that made a loan to that company’s Cayman subsidiary. Usually such a loan to such a subsidiary suggests a fiddle. Whether Sinha knew this or not is a different issue. Though the evidence does not suggest any malfeasance, there is room for scepticism.

Omidyar Network proclaims its belief: “Just as eBay created the opportunity for millions of people to start their own businesses, we believe market forces can be a potent driver for positive social change.” Grand words, but that hardly conceals the true goal that is to make bucks, sometimes fast ones too. Again as Galbraith puts it: “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”

Way back in mid-1980s, Sinha, then fresh out of one of the IITs, worked with me on a paper that proposed mass construction of smokeless chullahs for rural homes as a profitable employment for hundreds of thousands of rural workers. I remember it as a bit of an elaborate scheme that also computed savings due to improved health and the added jobs created in the rural sector and firewood savings. It was published in a well-known pink newspaper and the then Prime Minister Rajiv Gandhi took note of it. Clearly, he was a well-meaning and bright young man. I was impr-essed enough to write a recommendation when he applied for a Masters in Energy Management at Pennsylvania. I next met him when I was serving as his father’s advisor in the finance ministry. Jayant and his wife were both working with foreign companies investing in Indian stocks. He was apprehensive about a proposal made by me to disinvest PSU stocks by selling them to the governments banks for onward restructure and disinvestment. He was concerned over its effects on some PSU shares in which his wife and her employers had invested in. The minister had clearly spoken to him. At that time too, I wondered if the HBS’s core business ethics course would have seen “conflict of interest” issues in it? The minister, however, had showed he had plenty of flex — pun intended — in him.

The government is said to have ordered investigations against Jayant Sinha and all the others named in the Paradise tax avoidance capers. His father has naturally taken umbrage at this. He has demanded to know if people like Jayant Sinha have to be investigated, why shouldn’t Jay Amit Shah be investigated for what is more apparently a scam? The facts of Jay Amit Shah’s case are essentially that a company that had a life of three years registered a 16000% growth in its second year and then folded up in its third year. On the face of it, it does seem to be a money laundering scam. Instead of it being investigated the website, thewire.in, that broke the news based on the official statements obtained from the Registrar of Companies, is being investigated. People like Jay Amit Shah are not expected to have the sophisticated sense of a Harvard or Wharton Business School graduate formally schooled in ethics. Jay Amit Shah just hit it when the iron was hot. So Yashwant Sinha has a point. To my mind, tax avoidance is perhaps just as reprehensible as tax evasion. The finance ministry has consistently failed to plug the loopholes, even the fact that little Mauritius and Singapore are our two biggest sources of FDI. Sinha was too junior in the finance ministry to have expressed views on this. It would have been unlikely though for that is not the HBS way. The previous finance minister, himself a Harvard MBA, would not have left footprints for young Sinha to tread on. Neither would the present inveterate lawyer finance minister.