Coloured money--all about tax?

Coloured money--all about tax?

On 6 July 2009, finance minister Pranab Mukherjee, in his budget speech, indicated the United Progressive Alliance (UPA) government’s intent to expand the scope of tax treaties by empowering the government to enter into TIEAs (tax information exchange agreements) with non-sovereign jurisdictions. Since then, India has completed negotiations with 10 ostensible tax havens—the Bahamas, Bermuda, the British Virgin Islands, the Isle of Man, the Cayman Islands, Jersey, Monaco, Saint Kitts and Nevis, Argentina and the Marshall Islands. This is from 22 identified jurisdictions to facilitate the exchange of information for tracking tax evaders. It would not be out of place to mention the role of the Group of Twenty communique that threatened action against such jurisdictions, which opened the dialogue for such agreements.

The Organisation for Economic Co-operation and Development’s (OECD) Tax Report on Harmful Tax Competition highlights the importance of a robust network for exchange of information. In fact, OECD considers such exchange to be of paramount importance for determining whether a jurisdiction can be classified as a “tax haven". The relevance of TIEAs can be ceded based on increased concern over money laundering and such laundered funds being used for terrorism, drug trafficking, arms dealing, etc.

While exchange of information is crucial for cracking the whip on tax evaders, also interesting is the whole debate if India can accomplish it without a tax amnesty scheme. Memory is fresh on the success of then finance minister P. Chidambaram’s 1997 Voluntary Disclosure Incentive Scheme, which resulted in more than Rs10,000 crore in tax from disclosures of three times the tax collected. On the one side, while this might be a way to bring home illegal money stashed overseas and to use it for the common good, the bigger ethical question that arises is whether this is a necessary cost that an honest taxpayer needs to bear. Article 14 of our Constitution confers on each citizen the fundamental right of equality, besides of course a philosophical argument to shelter tax evaders before law.

When the 1997 scheme came up for adjudication before the apex court much after resounding success, the Supreme Court bench made observations in line with the principles of fundamental rights. Such a scheme deserved merit in 1997 when historical tax rates were abysmally high, prior to the 1997 dream budget, which drastically cut the rates. But in a situation where tax rates have stabilized, does such a tax amnesty lead to class legislation, which in itself could be violation of the common man’s fundamental rights? Further, the scheme may still have to address exchange-control violations, possibly the money laundering law, and ancillary compounding consequences.

Developments in the US are worth following. The US, in its bid to clamp down on 52,000 Americans suspected of evading taxes, negotiated an agreement in 2009 with Switzerland for request of information from the US Internal Revenue Service (IRS). This was on the back of a voluntary disclosure programme that required Swiss bank clients to give a waiver to the bank to provide their account information to the IRS. The US follows a different philosophy in its disclosure schemes, which have a look back period of six years and penalize residents for making “quiet disclosures" outside the disclosure scheme. Further, criminal penalties are levied in the case of failures to disclose offshore accounts, and the applicant is required to plead guilty to such criminal charges.

Responding to a recent Supreme Court directive to the executive to know the exact sources for unaccounted money, the Indian government, based on information provided by Germany, served notice on 17 Indians who allegedly stashed money in jurisdictions known for their strong banking secrecy laws such as Liechtenstein. On the one hand is the Supreme Court’s scathing remarks and criticism for failure to reveal identity of individuals who have allegedly stashed funds in offshore banks, and the executive not doing enough to save “plundering" of the nation. On the other hand, most TIEAs require that information shared under the pact cannot be made public, and can only be used to track tax evaders.

Negotiating and concluding a TIEA is indeed a time-consuming process and entails diplomacy and tact. India inked its TIEA with Switzerland in 2009, but the country is still waiting for the Swiss parliament to ratify this in accordance with the principles of international public law. While most TIEAs follow the OECD model convention whereby disclosures can only be sought for fighting tax evasion or tax frauds, roving or fishing inquiries are not entertained. In the aftermath of developments surrounding “black money", the proper use of TIEAs will assume greater importance in times to come.

The author is a partner at BMR Legal.

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