Get­ting Black on Track

The Economic Times - - The Edit Page - Di­nesh Kan­abar

The re­lease of the ‘Panama Pa­pers’ is the lat­est in a se­ries of de­vel­op­ments that brings to light the mag­ni­tude and the se­ri­ous­ness of the ‘overseas black money’ de­bate. As the re­lease in­di­cates, this prob­lem is by no means lim­ited to In­dia alone. But it is un­de­ni­able that it will re­ceive wide­spread at­ten­tion here in this coun­try. This is largely due to in­creased pub­lic at­ten­tion aris­ing from this is­sue dom­i­nat­ing In­dia’s po­lit­i­cal, ju­di­cial as well as me­dia land­scape over the last few years.

The Panama Pa­pers, in par­tic­u­lar, fo­cus on se­cre­tive off­shore com­pa­nies and throw light on how these can be used to fa­cil­i­tate bribes, arms deals, tax eva­sions, fi­nan­cial fraud and traf­fick­ing. In the In­dian con­text, specif­i­cally, this raises sev­eral is­sues sur­round­ing vi­o­la­tion of ex­change con­trol norms and tax eva­sion, par­tic­u­larly in the light of the re­cently en­acted Black Money law.

There are three spe­cific sit­u­a­tions that need to be con­sid­ered in the con­text of the broader de­bate sur­round­ing the re­lease of the Panama Pa­pers. The first and most se­ri­ous situation re­lates to In­dian res­i­dents us­ing off­shore en­ti­ties in tax havens to hold undis­closed cash and fi­nan­cial as­sets. This is­sue was sought to be tack­led by sev­eral ad­min­is­tra­tive and leg­isla­tive ef­forts over the last few years, the most no­table one be­ing the strin­gent Black Money law en­acted in 2015.

In ad­di­tion to pro­vid­ing a new frame­work for tax­ing and pun­ish­ing those with undis­closed money and as­sets abroad, the Act pro­vided for a lim­it­ed­pe­riod com­pli­ance op­por­tu­nity en­abling a one-time dec­la­ra­tion to be made in re­spect of as­sets overseas. De­spite over $500 bil­lion of black money be­ing es­ti­mated to be stashed overseas by In­di­ans, the com­pli­ance scheme at­tracted a measly .₹ 4,164 crore of black money de­clared by 644 per­sons, which led to a tax col­lec­tion of .₹ 2,428 crore.

If one were to step back, the trend of In­di­ans hold­ing undis­closed as­sets overseas arose over sev­eral decades due to a com­bi­na­tion of fac­tors, which in­cluded very high tax rates in In­dia, dif­fi­cul­ties faced by In­di­ans in send­ing money abroad (even for le­git­i­mate rea­sons) prior to 2004, as well as a poor ex­change of in­for­ma­tion frame­work be­tween gov­ern­ments that made it vir­tu­ally im­pos­si­ble for in­comes re­ceived abroad to be tracked by In­dian tax au­thor­i­ties.

None of these mo­ti­va­tions sur­vive today. In­deed, the Lib­er­alised Remit­tance Scheme framed by the Re­serve Bank of In­dia (RBI) has been grad­u­ally ex­panded — bar­ring a brief pe­riod in 2013 — and now per­mits In­di­ans to re­mit up to $250,000 abroad a year. Tax rates in In­dia, too, have been sig­nif­i­cantly mod­er­ated, and can hardly be re­garded as in­cen­tivis­ing the stash­ing of money overseas.

Fi­nally, the ex­change of in­for­ma­tion is be­com­ing in­creas­ingly seam­less and tax of­fi­cials are now adept in tak­ing re­course to ex­change of in­for­ma­tion mech­a­nisms to tar­get undis­closed money tucked away overseas.

This makes the poor re­sponse to last year’s one-time com­pli­ance op­por­tu­nity un­der the Black Money law quite sur­pris­ing. While there were un­doubt­edly prob­lems aris­ing from the lack of clar­ity on val­u­a­tion and other is­sues un­der the scheme, one would have thought that peo­ple with undis­closed as­sets abroad would have seen few ben­e­fits and high risks in con­tin­u­ing with the off­shore struc­tures. Clearly, that has not been the case.

The other two is­sues in the con­text of the Panama Pa­pers is that of non­res­i­dent In­di­ans park­ing gen­uine funds earned abroad in off­shore struc­tures and of res­i­dents send­ing le­git­i­mate funds abroad un­der the RBI’s Lib­er­alised Remit­tance Scheme (post-2013, when in­vest­ment in newly set up en­ti­ties was per­mit­ted). As long as the in­comes aris­ing on such off­shore funds are of­fered to tax, the mere ex­is­tence of such off­shore struc­tures is not il­le­git­i­mate. One hopes that this distinc­tion is kept in mind as the pub­lic de­bate over the Panama Pa­pers con­tin­ues.

The re­lease of the Panama Pa­pers and the re­ac­tion to them are in many ways a clas­sic in­stance of what one can ex­pect in the com­ing days. De­spite the ob­vi­ous pri­vacy is­sues in­volved — the re­lease is based on con­fi­den­tial data leaked by an anony­mous source that may lead to ques­tion­ing the au­then­tic­ity of the data — the fo­cus is al­most en­tirely on the po­ten­tial vi­o­la­tions that the in­for­ma­tion throws up, rather than on the data breach it­self.

In­deed, this is a sign of the al­most hos­tile en­vi­ron­ment in which cases of undis­closed as­sets will be iden­ti­fied, as­sessed and ul­ti­mately lit­i­gated in the days ahead. One can al­most cer­tainly ex­pect the re­lease of these pa­pers to give an im­pe­tus to In­dia’s ef­forts in track­ing down black money.

The writer is CEO, Dhruva Ad­vi­sors LLP

Spotted, un­der that Panama hat

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