The Apex Court’s directive last week to widen the net on disclosure of offshore bank accounts seems to have eventually put the ‘coloured’ money conundrum in perspective. The existence of long-living ‘parallel’ economy seem to have hit the discomfort zone of commoners after a group of eminent citizens filed a public interest litigation (PIL) alleging government inaction in dealing with the menace of funds stashed in offshore banks. Hearing the petition last week, the Court made important observation by stepping up the pressure and asking the government to file an affidavit with disclosures on sum involved, identity of people and steps taken to recover the same.
The Court's comments are scathing, as it quoted the hoarders of tainted money as committing national treason. The bench exuded discomfort by insisting that it could not comprehend the ‘so called’ difficulty in disclosing such information in defense to government’s reluctance to hold back from making it public. To me it seems, the decision to hold back disclosure of names is keeping in line with international tax convention on exchange of information and related secrecy.
Whatever eventually be the outcome of this outcry and PIL (political or otherwise), it is obvious that illicit funds violate a host of criminal and economic codes, tax laws, exchange control regulations, and last but certainly not the least, banking regulations. Indian law makers shall have to battle through a host of regulations and procedures to take this to its logical conclusion and the task is indeed daunting. It’s not just about tax evasion, it seems to entail regulation on money laundering front at domestic and international level. Just like tax information exchange conventions, countries enter into cooperation for prevention of money laundering. I read the outcome of Apex Court’s deliberations (on the PIL) beyond the realm of tax evasion.
Consecutive studies have revealed that the most popular destinations attracting funds more frequently through ‘money laundering’ are Switzerland, Luxembourg, Liechtenstein, Channel Islands and the Bahamas. IMF forecast for June 2010 indicate that the aggregate size of money laundered is between 2% and 5% of reported global GDP of $ 60 trillion making it effectively the 3rd largest industry. The size of India’s ‘parallel’ economy alone has been pegged between $0.5 trillion to 1.4 trillion, as per the press release from the Ministry of Finance dated January 25, 2011, though, caveated saying there is no credible evidence.
G-20 communiqué and tax information exchange Following the G-20 communiqué of April 2009, significant strides have made by world economies towards implementing globally accepted transparency standards in tax matters. The OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes underwent serious restructuring in September 2009 at the behest of the G20, and India plays a material role in the forum. It was the chosen body to coordinate multilateral efforts at increasing transparency of tax havens and secretive financial centres. The Forum now has 95 member countries including G20, all OECD members and most major financial centres.
Much of the progress made by the forum can be attributed to the growing focus on exchange of information amongst nations; statistics reveal this pace as while only 70 Tax Information Exchange Agreements (TIEA) had been signed between 2000 and 2008, 500 new agreements have been signed in last past 2 years . The pressure from G20 has forced jurisdictions like Switzerland and Liechtenstein to sign information sharing agreements to get off the “grey list”.
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For record, TIEAs are bilateral agreements intended for use where a Double Taxation Avoidance Agreement (DTAAs) is considered inadequate for exchange of information. TIEAs though narrower in scope than DTAAs, are comprehensive and lay detailed guidance to track tax evaders.
Banking secrecy laws being diluted In a related development, post the G-20 summit, certain jurisdictions (Switzerland, Liechtenstein, Luxembourg, and Austria) offered to relax their banking secrecy norms to facilitate exchange of tax information with Revenue authorities of other jurisdictions. Though jurisdictions offering offshore banking facilities have been reluctant to dilute their respective banking secrecy code as it impacts the confidence of their clients, I guess this aspect has turned out to be the most potent weapon to deal with tax evasion in the era of global recession. It gives legitimacy for governments to collect tax on offshore income and bridge deficits. However, in the Indian context, it still doesn’t address the issue of violation of exchange control violation; an economic offence greater in magnitude than tax evasion.
India upped the ante seeking information from the Swiss authorities under the exchange of information clause of the tax treaty. Historically, Swiss code strictly limited information sharing even for tax evasion unless it was a tax fraud. However, the recently re-negotiated tax treaty between India and Switzerland will allow India to access information on unaccounted money for taxation purpose, with a widened scope to cover banking transactions as well. Though the need to publicly disclose names is not within the ambit of the tax treaty, it is reasonable that such names be kept confidential to prevent smooth investigation of cases. However, before the renegotiated treaty is put to implementation, the Swiss parliament has to ratify it unlike an administrative act of ratification in India. The Swiss legislative procedure may very well take another nine to twelve months.
MoF’s five pronged strategy The recent press statement of January 25 (few days before the Apex Court’s directive) from the Ministry of Finance suggests that it has formulated a five-pronged strategy which consists of joining the global crusade against ‘black money’; creating an appropriate legislative framework; setting up institutions for dealing with Illicit Funds; Developing systems for implementation; and Imparting skills for effective action.
That brings to the fore a debate if India is bracing for another dose of voluntary disclosure of income scheme, specifically targeted to tackle offshore funds. Besides my view that a VDIS in this environment is an unlikely outcome, even if the law makers decide to, it would not be an easy decision as it would open a fresh debate.
Summing up, the issue in hand calls for greater level of international cooperation between the ‘requesting and requested countries’ as pointed out in a recent working paper by the Basel Institute on Governance, Switzerland besides of course by administrative reforms and judicial directive. The think-tank has made an interesting observation on gaps between the government’s call for international cooperation and willingness to make it happen. It points out that lack of ‘political will’ can potentially derail government’s initiatives on an issue where there is virtual consensus by the civil society.
The author is a Partner with BMR Legal and was assisted by Sumit Singhania. Views expressed are entirely personal.