FINANCIAL FLOWS FROM

INDIA

REGULATE, MONITOR

AND

INVEST BACK

Tax agreements-1

• Government of India has resolved to unearth

unaccounted money parked outside India. The

steps being taken include amending the Income

Tax Act, 1961 to enable the Central Government to

enter into agreements with non-sovereign

jurisdictions also for exchange of information and

other purposes.

• Steps have already been initiated for negotiations

for entering into agreements for the exchange of

information with other nations and renegotiation of

the double tax avoidance treaty with Switzerland is

in process.

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Tax agreements-2

• India participates in the global efforts to facilitate exchange

of tax information and to take action against tax evasion.

These efforts need to be strengthened to eliminate

opportunities for investment of wealth earned through

corrupt activities and prevent corrupt practices.

• Financial Action Taskforce (FATF) on money laundering

recommendations enables on combating money laundering

mandate compliance with certain international cooperation

standards. India worked towards full membership of the

FATF which makes it mandatory for the country to revisit its

policies in this regard.

• India assists the World Bank in realising its Governance and

Anti-Corruption Strategy in its Indian projects.

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In different locations of the world, about 70 odd

small territories endeavor to attract investment from

outside their border offering financial secrecy

laws. These are commonly known as “tax havens”,

because they also impose little or no tax on income

from sources outside and are ideal lodges for black

money of many countries. Switzerland is a major

tax haven with more than a third of global private

funds deposited in its banks.

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• Recently, secret banking and tax havens

became the target of Germany and France,

and later the UK and USA. These nations have

begun a crusade against tax havens and,

especially, against Switzerland.

• This new development opens up a great

opportunity for India, which has been a victim

of flight of capital to tax havens and secret

banks.

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There is a difference between black money within

the country and the black wealth shifted out of

India. While both are bad and are prejudicial to

the national economy, the black wealth stashed

out of India represents capital flight from India. It

is a total loss to the nation. On black money the

government and the people lose the tax. But in

capital flight the country itself loses the money.

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Any measure to recover the monies stashed away

from the country requires strategic approach

combining geo-political diplomatic action at

the global level and developing appropriate

infrastructure in India to bring it back. This effort is

needed not only to protect the national economic

interests, but also to ensure that the secret channels

are not made use of to fund anti-national work

including terror.

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The government is negotiating Double Taxation Avoidance

Agreements (DTAA) with different tax havens and making

provisions for clauses under which the governments and

banks could be compelled to disclose the account details.

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Financial Intelligence Unit (FIUs)

• India is a member of Egmont Group, which is an

international body to stimulate cooperation amongst

Financial Intelligence Unit (FIUs) across the globe.

• FIU-India was made a member of the Egmont Group

at its recent Plenary Session at Hamilton, Bermuda

after verification of the FIU India’s operational status

and ability to share information with foreign FIUs.

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• The Egmont Group membership, apart from

meeting an important requirement of Financial

Action Task Force (FATF), will facilitate and

enhance the exchange of information by FIU-India

with other FIUs.

• Admission of FIU-India into the Egmont

Group is a major step forward for India to join the

international community in its fight against money

laundering and financing of terrorism.

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India has signed DTAA with 77 countries (by 2009)

“ I have asked the revenue dept. to reopen

negotiations for all 77 DTAAs with all the

countries that we have entered into so far, so

that we can have real time exchange of

information on tax evasion and tax avoidance.”

Pranab Mukherji had said. In Nov. 2009.

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• The Govt of India has signed a protocol with the

Govt of Switzerland in August 2010.

It is signed to enable India to deal with Swiss bank

accounts of Indian tax evaders so as to collect due

taxes.

After legal requirements are met and Swiss

Parliament approves notifications the protocol will

take effect.

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FIVE-PRONGED strategy adopted to curb the

menace of illicit funds.

1) Joining Global Crusade Against 'Black Money':

India becoming Vice Chair of the Peer Review

Group of the Global Forum on Transparency and

Exchange of Information for Tax purposes does not

indeed make India a crusader. We do have live

examples of what may constitute a 'crusade'. A

simple reference is required to be made to what the

Obama Administration has done to UBS and other

banks in various tax havens. It has also come out

with a new tax law which imposes severe penalty

for tax evaders, routing their income to tax havens.

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We have examples like Germany and UK which

have truly launched a crusade against tax evaders

and also recovered huge revenue. It would indeed

be too naive to say that by becoming a Member of

Financial Action Task Force and the Task Force on

Financial Integrity and Economic Development,

India's stature has risen to the level of a black

money crusader. All such memberships are

institutional arrangements towards sharing

information but acting on them requires a different

set of political priorities which should be clearly spelt

out by the UPA Government.

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2) Creating an appropriate legislative framework:

On this front, multiple efforts may be seen but no concrete

step has been taken to design a web of legislative tools to

curb generation of black money and ensure recovery of

untaxed wealth vaulted in some tax havens. True, a significant

step has been taken after G-20 Summit in 2009 to amend the

DTAAs but obtaining information is just the first step towards

zeroing in on possible tax evaders. Substantiating evasion in

such cases and then recovering taxes require many more

legislative legs to walk across to success. All the steps

enumerated by the FM like TIEAs, PMLA, TP provisions etc

are not adequate for successful recovery of the lost wealth.

Criminal aspect of tax evasion calls for a hard look at the

entire platter of legislative tools available to the taxmen.

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3) Setting up institutions for dealing with Illicit

Funds: Steps taken so far to create a network of

ITOUs is indeed a laudable decision. However, key to

success is the consolidation and integration of

networks to produce the desired results in time-

sensitive paradigm. The existing setup in CBDT and

the creation of dedicated exchange of information unit

will not suffice. A dedicated R&D unit would be

required to identify the loopholes in the DTAAs so that

they could be plugged in. A close watch and study of

legislative measures being taken in other economies

would help. A sharp eye on the changing business

contours of MNCs and the complex architecture of

financial transactions may help detect cases like

Vodafone.

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4) Developing systems for implementation:

Some of the steps suggested by the Finance

Minister are indeed commendable. But a

scientifically-prepared HR database is the need of

the hour. The CBDT needs to list out qualities

required in officers for this specific type of

assessment and investigation. Merely posting

officers who had done some stints either with the

FT & TR and Directorates of TP and International

Taxation would not be enough. There could be

hundreds of other officers in the field who may be

more suitable for this sort of job. The Board simply

needs to transparently develop parameters to

achieve this goal.

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Strengthening TP Audit is fine but the quality of

DRP orders needs greater attention of the Board

(a detailed piece may follow later on this issue).

Handling mega revenue cases before various

courts of law calls for better vision and sincerity

which appears to be glaringly lacking today.

There are hundreds of TP and International

Taxation cases, which call for in-depth study by

policy makers, and also a hardened approach to

defend the Revenue.

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5) Imparting skills to the manpower for effective

action: On the front of preparing manpower for

detection of frauds in cross-border transactions,

merely training a few dozens officers overseas will

not do. A long-term strategy to create suitable

infrastructure at NADT with quality faculty would help

more. If need be, some foreign faculty can be hired

for periodic training sessions. The Board can use the

huge wealth of retired officers who can be of great

help to the cause of Revenue.