Sebi-CBDT info-sharing pact facing roadblock over confidentiality clause

Confidentiality clause about foreign jurisdiction prevents tax board from sharing sensitive details with market regulator

The recent information-sharing agreement between the direct taxes board and market regulator Sebi is facing a roadblock. The reason, according to officials, is the confidentiality clause in the tax agreements with other nations.

The Income Tax department has to abide by  the confidentiality clause which holds it back from sharing details obtained through tax treaties, particularly about offshore entities.

“The exchange of data has certain exceptions and limitations,’’ said a senior tax official privy to the pact.

The tax department receives a bulk of information not just from domestic sources but also from foreign jurisdictions. Some of that is very sensitive in nature and cannot be shared with any other investigative agencies or even regulators as a strict non-disclosure clause accompanies the information exchange treaties, the official pointed out.  

The Central Board of Direct Taxes (CBDT) and the Income Tax department obtain data from foreign nations and tax haven jurisdictions under Double Taxation Avoidance Agreements (DTAAs) or Tax Information Exchange Agreements (TIEAs). However, restricting the information about foreign entities could pose a challenge for the market regulator while tracking down entities or beneficial owners using stock exchange platforms with a sole purpose of money laundering and round tripping, sources said.

Besides domestic investors, Sebi deals with foreign portfolio investors and keeps a close watch on the ultimate beneficial ownership of each investment coming from several overseas jurisdictions including Mauritius, Singapore, US, the UK and so on. The memorandum of understanding (MoU) between CBDT and Sebi was signed keeping in mind the challenge in accessing information from foreign jurisdiction. Also, the MoU was inked in sync with Section 138 of the Income-Tax Act that deals with the mechanism of disclosure of information of assesses by the taxmen.

A detailed questionnaire sent to CBDT remained unanswered.

The MoU, which came into force in July, said it would facilitate sharing of data and information between the two on an automatic and regular basis. It’s expected to ensure that both agencies have seamless linkage for data exchange. It does not, however, mention the standard operating procedure for information sharing and the exceptions.

Under normal course and prior to this pact, the I-T department has been in receipt of trading data filed through stock exchanges annually. The data pertaining to securities transaction tax levied on the trade contains detailed information on individuals and entities. Sebi also shares information regarding capital gains in relevant cases.

As for I-T, it provides information to Sebi on request and on suo motu basis, based on information available in the database for the purpose of scrutiny, inspection, investigation and prosecution. Typically, the tax department cannot provide any individual information unless the government is notified to do that.

“The agreement is aimed at tracking entities using a stock exchange platform for tax evasion. Also, the sharing pact enables real time data to help securities regulators combat insider trading matters and detect unfair trade practices,” said a regulatory official.

On the pact not divulging the standard operating procedure, experts cite data privacy provisions. There’s already an ongoing debate on international tax administration fora versus taxpayers’ rights.