Getting Black on Track
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