Friday, June 29, 2012

Law Street (The Economic Times, June 29, 2012)

Dear Readers,

Our newspapers continue to report about the menace of black money. Zenobia Aunty wonders why India is hesitant to enter into revenue sharing agreements with Switzerland. After all, if there is tax imposed on Swiss bank accounts, there would be less inclination to hoard money there, plus the disclosure norms that have just kicked in will also act as a deterrent. For her views, read Law Street online, by clicking here or scroll down.

Best regards,

Black isn’t beautiful

• Revenue sharing agreements can help in tax recovery
• Tighter disclosure norms will provide transparency
• Special courts must be suitably equipped

When this columnist was a school-kid, Ten-rupee notes were black in colour and she thought these notes were black money. Notes have given way to shiny coins, but black money continues to plague our economy. The MoF has decided not to leave the definition to a child’s imagination and its recent White Paper, defines black money as: ‘Assets or resources that have neither been reported to the public authorities at the time of generation nor disclosed at any point of time during their possession’.

Recent years have witnessed more pro-active measures by the government to tackle the problem, with exchange information being introduced in tax treaties and ‘tax information exchange agreements’ being signed.

A very recent move, introduced by the Finance Act, 2012, has been the disclosure requirements in tax returns. The White Paper also covers this move: ‘Reporting mechanisms for those operating assets and banking accounts abroad is strengthened by making filing of return of income mandatory for every resident (excluding a person who is not ordinarily resident in India) having any assets or banking accounts located outside India even if such person does not have taxable income’. Any false information or withholding of information will result in prosecution.

‘Tut-tut’ says Zenobia Aunty. She thinks that those who stash black money abroad are not deterred. For once, the MoF seems to agree with her. In the White Paper it admits: ‘Sometimes taxpayers may be willing to take a calculated risk of tax evasion and may even justify it as a 'commercial risk', which can be deterred by effective prosecution. The prosecution calls for rigorous imprisonment of up to seven years and a fine. However, the actual state of criminal prosecution in tax matters in India is somewhat dismal. In very few cases, do the tax authorities opt for prosecution and subsequent conviction in tax evasion cases is rare and cannot be found even in high-profile search cases. The absence of a specialized prosecution wing and the cumbersome procedure contribute to this state of affairs’.

The Government is taking measures to remedy this situation. A separate Directorate of Criminal Investigation has been established to deal with tax offences and special courts are to be set up. One hopes that the Directorate and Special Courts will be adequately staffed with the right people; else this plan will just remain on paper. ‘Time is of the essence,’ comments Zenobia Aunty and examines the tax revenue sharing agreements that Switzerland has entered into with UK, Germany and Austria. It has plans to enter into such agreements with several other countries.

While the agreement with UK was entered into last year, it was recently modified. From January 1, 2013, investment income earned by UK residents in Swiss financial institutions will be subject to 48 per cent withholding tax; while dividends at 40 per cent and capital gains at 27 per cent. There will also be a first time one off tax imposed to make up for tax lost in the past years. This will vary between 21 to 41 per cent, depending on the value of the account and period for which it was held. The taxes withheld will flow into the UK treasury. However, an option is provided to the UK residents. Both the future and retrospective withholding tax provisions will not apply to anyone who authorises their Swiss financial institution to disclose their accounts to the UK revenue and declares and pays tax in their UK tax return. This agreement is a win-win situation, as Switzerland gets to keep its prized banking secrecy and UK their share of taxes. The agreements with Germany and Austria are based on almost the same norms.

Our Government is well aware of such agreements, but the White Paper adds: India will have to take a decision first as to whether these will meet its national objective. The main concern is that while India will get its tax revenue, Switzerland under the agreement will not part with the identity of the banking customer. The Indian government has proposed further discussions and debate.

Do we really need another endless bout of discussion? Haven’t countless Bills being stuck up because the Parliament is not functioning as it ought to? Let us sign such agreements, let us continue with the requirement of disclosure in tax returns and let us strengthen the arms of the prosecution department and set up special courts. To begin with, we will get our much needed funds, at the same time domestic disclosure norms coupled with the fact that tax will get withheld on money stashed in Switzerland may prompt many Indian residents to come clean. The option of coming clean should exist as has been done in the UK. We need to make headway. Black is no longer beautiful.

Source of the photograph: Downloaded from Flickr and used as per the terms of the Creative Commons License.

1 comment:

Catarina said...

Lubna, the Swedish tax authorities have agreements with all countries in the world that you can possibly make such agreements with.

Catch is all Swedish multinationals get away with not paying taxes anyway because of having different companies all around the world and juggling "their accounting".

What will happen if and when India goes down the route you suggest is that private and small businesses will get in trouble.

But the big money that the tax authorities would like to get their hands on will escape them. And always will.