Rul­ing may make things tough for tax­man

SC Breather for HSBC Geneva A/c Hold­ers

The Economic Times - - Front Page - SU­GATA GHOSH

Swiss bank ac­count hold­ers who have been qui­etly cel­e­brat­ing the exit of P Chi­dambaram now have an­other rea­son to re­joice. Al­most three-fourths of the 600 or so named in the list of clients of HSBC Geneva are ben­e­fi­cia­ries of “dis­cre­tionary trusts”. These in­di­vid­u­als are con­fi­dent that a Supreme Court rul­ing this week on off­shore trusts will get the tax­man off their back. Tax of­fi­cials have been pur­su­ing off­shore ac­counts held by In­di­ans, es­pe­cially those on the HSBC list that orig­i­nated with an em­ployee of the bank.

The apex court has ruled that In­dian res­i­dent ben­e­fi­cia­ries shall not be taxed on the in­come of an off­shore dis­cre­tionary trust as long as the trustees do not dis­trib­ute in­come to the ben­e­fi­cia­ries.

Con­trary to pop­u­lar per­cep­tion, very few in the HSBC list have di­rect num­bered ac­counts. Most of them are mem­bers of trusts that have ac­counts with HSBC Geneva. A dis­cre­tionary trust is one that gives a ben­e­fi­ciary no right to any part of the in­come of the trust property, but vests in the trustees the dis­cre­tionary power to pay the per­son what they deem fit. “The HSBC ac­counts were used to hold undis­closed wealth parked abroad. The ben­e­fi­cia­ries were care­ful enough not to re­ceive any money in In­dia from the trusts as that would have come via bank­ing chan­nels and would have been eas­ily traced,” a se­nior tax prac­ti­tioner who ad­vises sev­eral off­shore ac­count hold­ers told ET. “In­stead, the ar­range­ment with the trustees was that some trust earn­ings were paid to ben­e­fi­cia­ries when the lat­ter went abroad on busi­ness or hol­i­day trips… Also, in many cases, there were in­struc­tions to the trustees to re­lease funds for ed­u­ca­tion ex­penses for fam­ily mem­bers en­rolled in for­eign uni­ver­si­ties.” The Supreme Court case re­lates to tax claims made on ben­e­fi­cia­ries of two pri­vate trusts set up in the early 1960s in the UK by Ma­haraja Vikram­sin­hji, the for­mer ruler of Gon­dal, a princely state in the Bom­bay Pres­i­dency. The Supreme Court rul­ing not only ends the dis­pute that has been go­ing on for years be­tween the tax depart­ment and mem­bers of the Gon­dal royal fam­ily but has come at a time when the HSBC ac­count hold­ers were try­ing to de­ter­mine how the next govern­ment would pur­sue the mat­ter. Speak­ing to ET, a se­nior tax depart­ment of­fi­cial said that the ben­e­fi­cia­ries may not be able to es­cape the tax net if there is ev­i­dence of spend­ing dur­ing over­seas vis­its. “The trustees will have records of pay­ment to the ben­e­fi­cia­ries,” said the per­son. In fact, the Delhi in­come-tax of­fice has asked some of the HSBC Geneva ac­count hold­ers to give an un­der­tak­ing that they have not spent money re­ceived from trusts or trustees on for­eign trips. How­ever, it could be ex­tremely dif­fi­cult for the In­dian tax of­fice — hav­ing built their case so far on stolen data and yet to re­ceive any clinch­ing ev­i­dence from the Swiss au­thor­i­ties -— to ac­cess such book-keep­ing records of off­shore trusts in tax havens. Point­ing out that “the in­come has been re­tained and not dis­bursed to the ben­e­fi­cia­ries”, the Supreme Court said merely be­cause the trust’s set­tler, the for­mer Ma­haraja, and af­ter his

‘The ben­e­fi­cia­ries may not be able to es­cape the tax net if there is ev­i­dence of spend­ing dur­ing over­seas vis­its’

death, his son, did not ex­er­cise their power to ap­point “dis­cre­tion ex­er­cis­ers”, the char­ac­ter of the sub­ject trusts don’t get al­tered. Thus the UK trusts, ac­cord­ing to the court, con­tin­ued to be “dis­cre­tionary” trusts for the as­sess­ment years. “The HSBC case is un­likely to be among the top pri­or­i­ties for the new govern­ment. Res­i­dent In­di­ans with undis­closed over­seas ac­counts or in­vest­ments in for­eign shares be­fore RBI’s lib­er­alised re­mit­tance scheme was an­nounced are pos­si­bly hop­ing the govern­ment would con­sider an amnesty or a quasi­amnesty scheme to bring back money from tax havens,” said a char­tered ac­coun­tant with a leading firm.

In June 2011, France had handed over data on Swiss bank ac­counts to coun­tries such as In­dia, the US, UK, Canada and Aus­tralia. De­spite the depart­ment’s best ef­forts, HSBC and the ac­count hold­ers have parted with very lit­tle in­for­ma­tion to the tax of­fice.

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