TIOL - COB( WEB) - 420
OCTOBER 30, 2014

By Shailendra Kumar, Editor

TAX Evasion and Tax Avoidance are twin global issues confronting not only the global forums like OECD/G20, United Nations and others but also individual countries. The problems are a little more serious for the developing and emerging economies as they need to generate more tax revenue to fuel growth in their economies and meet the social aspirations of their people. In a nutshell, there are two facets of the continuing war against tax evasion - one at the international level and the other at domestic level by each economy starved of resources. Before we come to the battle being fought by different institutions within India, here comes the news from Berlin about a major milestone attained by the Global Forum on Transparency and Exchange of Information for Tax Purposes. As many as 51 tax jurisdictions yesterday signed a Multilateral Competent Authority Agreement which will put into action the much-awaited Automatic Exchange of Information highway by September 2017 and others will follow suit by 2018. Although such an agreement may not help an information recipient country in handling past cases but it will certainly make the world a smaller place for tax cheats. What further adds to the significance of this milestone is the agreement to expand the scope of information which will also include details of beneficial ownership of all legal entities. Information of this genre would empower tax authorities to fight their battle against multilayered entities devised to conceal the identity of actual beneficiaries of tax avoidance.

Let's now move to the domestic turf. In the past few days, the three places - the North Block, the Jhandewalan office of the Income Tax (Investigation) and the premises of the Supreme Court of India, have registered one of the highest footfalls. If we analyse the genesis of this mega event, one may go back to the pre-Diwali prayer of the Union of India whereby clarifications were sought from the Apex Court so that the Government is not compelled to share information obtained under the provisions of tax treaties. Prima facie there was no difference between the stands taken by the UPA Government and the BJP Government which had won elections by promising action in black money case as one of its major electoral planks. Given the fact that respecting confidentiality of information obtained under tax treaties cannot be presumed to be an unknown piece of provision for the Apex Court, making such a prayer, not different from the UPA-II, was no less than a 'trap' for the Finance Minister. What qualifies it as an embarrassing trap for the Modi Sarkar is the tall claim of action promised to the nation during the polls. Knowing the sensitivity of the issue, particularly for the Finance Minister, even if there are certain statutory impediments in disclosing the names obtained under the India-France Double Taxation Avoidance Agreement (DTAA), such a prayer was avoidable as it triggered high-decibel political controversy putting the Government on the defensive. Such a plea could also have been made by the AG as part of his argument during the hearing of the case and the Bench would have certainly heeded to it. But filing an affidavit and demonstrating its reluctance to share names evidently invited the ire of the Bench which minced no words when it asked the AG - why such a protective umbrella for tax evaders having foreign bank accounts? Such an observation against the motive of the Government was quickly lapped up by many political parties and other critics and the end result is that the Modi Government suffered a serious trust-deficit in the eyes of the common man.

In other words, the Government fell victim to either wrong advice or poor/inadequate application of judicial mind by insiders. Mr Arun Jaitley, a sharp lawyer himself, probably leaned too much on bureaucratic shoulders to handle this case. In normal times there would have been nothing wrong about such an official posturing but in the present high-voltage political ambience, the Modi Sarkar is required to walk cautiously on the issue of black money. Mr Jaitley should have known in advance that the Apex Court has closely been following the investigation in each case, and that is why it constituted the SIT which was approved in the very first Cabinet meeting of the Modi Government. Since the UPA Government had shown tell-tale signs of dilly-dallying on the issue of sharing details of investigation and the names obtained from the German and French Revenue, this had created a major trust deficit between the judiciary and the Executive. Since the UPA Government was not keen to share the names it had further triggered major suspicion in the mind of PIL-filers as well as the Bench. And that is why there was too much emphasis on the disclosure of names.

Let's go back to 2009 and 2011 when India obtained information from the German Revenue and the French respectively. The Germans had shared information about 12 Trusts having bank accounts in LGT Bank in Liechtenstein. There were 26 names of individuals. Nothing incriminating was found against eight of them. The investigation was completed and assessment orders were passed in 18 cases and prosecution was launched against 17 as one account holder had expired. In other words, some recovery of taxes was made in these cases.

What about the French data which has kicked up such a hot row today? As against the general perception that such a data was offered to India by the French on its own, the real story is that when the French Minister of Finance had visited India to canvass support for her candidature for the post of Managing Director of the IMF in 2011, India had proactively bargained for this data. A little more than 600 names with details of bank accounts and transactions done for a period of about 18 months or so was obtained by India. Investigations were taken up in right earnest. Soon, there was a change in guard in North Block. Even as the probe had begun to gather momentum, a parallel pressure game commenced to 'aid' a few having live political nexus. How can one assist a foreign bank account holder in a case which was under judicial probe? It was indeed a tough situation for the political masters of the UPA Govenment.

In this backdrop, let's examine what are the options available to 'assist' one caught in such a pincer-like situation. Going by the common sense, one would allow the limited investigation to be completed. Why limited? Given the fact that the Swiss authorities had clearly rejected India's request for information in all these cases on the ground that the information about the bank account holders was a stolen document and the Swiss law of bank secrecy did not allow any assistance if it was violated in some manner. Faced with such constraints, 'incomplete' investigation was wrapped up and the assessment process took into account only limited transaction details shared by the French. Whatever demand was raised, TIOL is sure, that must have been paid. So, where is the room for favour? One obvious room here is that the Department may not invoke the PENALTY provisions. And if there is no penalty, there can be NO PROSECUTION under Ss 276C and 277 of the Income Tax Act. And once there is no prosecution being launched by the Department, there is apparently NO NEED to share such information either with OTHER investigating agencies which may look into the source of such money parked abroad or with the Court as such cases may be bundled together as those where tax has been paid and the files closed. Whether such an option of official favour was really done should be properly investigated and monitored by the SIT. Ideally, the SIT should ask the CBDT to furnish a separate list of all such cases where the assessment orders were passed and tax was paid but no penalty or prosecution was launched.

Another key area which invites the attention of the SIT monitoring these cases is that whether merely because one was an NRI, one should be allowed to go scot-free by simply collecting taxes. There can be situations where one may be an NRI but the situs of income can be a corporate entity in India. In fact one may have multiple sources of income also and the entity in India can be one of the sources. Secondly, one may be simply a representative of a corporate entity. Although the bank account can be in the name of the representative but the money parked there actually belongs to the corporate entity in India. This aspect needs to be examined carefully and if there are violations, the information should be shared with the SEBI after launching prosecution. Such information would be useful from the perspective of provisions of Prevention of Money Laundering Act.

The decision of the SIT to make Enforcement Directorate as the nodal investigating agency is indeed appreciable as under money laundering provisions India being a Member of the FATF, can obtain assistance from its counterparts in many economies. The criminal aspect of all such accounts must be investigated properly otherwise, it would be a case of only half-justice done to the public interests. Given the fact that there would be no SIT for future cases, all such present cases being investigated should serve as a good example for tax evaders in future. Let's hope India finally gets to see some part of its stolen wealth finally brought back and taxes paid on them!