Financial Express

A public disclosure won’t help address the issue at hand, besides risking a botched up investigation

The debate on black money has both political and economic overtures. If one follows the history, the debate dates back to 2011, when renowned lawyer Ram Jethmalani filed a public interest litigation petition seeking a directive from the Supreme Court (SC) to the Centre, to initiate proceedings for repatriating the funds stashed in offshore bank accounts. While wealth escaping taxes largely form the core menace, there are other non-tax forms of violations, including those under the Foreign Exchange Management Act/Rules, Anti-Bribery legislation, etc.

In the past few years, given the global debate at various multilateral forums (G-20, OECD et al) on tax havens and enforcing transparency standards in tax matters, India, dehors the change in government, has not been distanced from the world insofar as its commitment to deal with such challenges is concerned. India has played an instrumental role, as part of the Global Forum on Transparency and Exchange of Information for Tax Purposes, since its formation in 2009, and has championed the cause by signing several tax information exchange agreements with treaty and non-treaty partners, including tax havens.

India makes tangible progress

The incumbent government’s swift action in constituting a Special Investigation Team (SIT) was a significant step towards unearthing black money. The fact that the SIT’s mandate is not restricted to cases of tax evasion makes the agency more credible in its endeavours. The members of the SIT, apart from 2 retired judges of the SC, are members from the investigative arms of the government, such as directorate of revenue intelligence, Financial Intelligence Unit, RAW, IB, enforcement directorate, etc. The expanse of the SIT’s mandate is over and above that of the concerns of the revenue department, which continues to remain administratively responsible for dealing with tax evasion cases under the domestic legislation and bilateral agreements, including preserving the terms of convention with India’s tax treaty partners.

The recent clamour over disclosing offshore account-holders’ information has taken a twist as the finance ministry believes that parting with such information until the investigation is complete—it is concluded that the offshore account being investigated is indeed illegal—could be seen as a breach of the confidentiality clause under the tax treaties. It is believed that considerable harm will be caused to bilateral relations if such disclosures are authorised and then adequate evidence is not found to proceed against the errant tax-payers.

Incidentally, the former finance minister, P Chidambaram, held a similar view and had exchanged letters with his Swiss counterpart to the effect. It is important to note that it is judicial intervention that led India and Switzerland to speed up the signing of a revised treaty in March 2013, with material amendments to Article 26 that deals with exchange of information and provides for the detailed procedure, including safeguards against misuse of such information.

Executive cautious after SC directive

Perhaps, the government is being cautious as it doesn’t want to invite the court’s wrath; a statement made by the court, that ‘confidentiality clauses are unconstitutional under Indian law’, is becoming the bone of contention. Also, the stress here is for making effective use of information by initiating proceedings for recovery of tax etc, and not for making the information public which remains a popular demand!

Making the information public, besides breaching treaty obligation, could hamper tax recovery—and that it is a legitimate concern.

Either way, the confidentiality of the information stands protected as the SC ordered handing over the information in a sealed envelope to the SIT, thereby maintaining the sanctity of treaty. A public disclosure won’t help address the issue at hand, besides risking a botched up investigation. The government would do well to seek clarity from the apex court, highlighting that signing international conventions (treaties) is enshrined in the Constitution and confidentiality clauses are an integral part of such treaties. Unless the treaty partners explicitly agree, the breach of the confidentiality clause on matters of information exchange could mean a disregard of the principles of treaty interpretation enshrined under the Vienna Convention on Law of Treaties which requires treaties to be interpreted in good faith.

India’s role in promoting global standards for automatic information exchange is visible; though, the issue of signing agreements for automatic information exchange is getting linked to FATCA due to the Centre’s affidavit at the SC. In my view, they are independent decisions, though both deal with principles of transparency and disclosure. India’s concerns on FATCA stem from the provision for penal levy of 30% withholding tax by the US IRS on foreign financial institutions on US source payments, given the quantum of investment flows. It would be speculative to predict if India would meet the December 31 deadline for FATCA, given the affidavit.

Government buys time

Lastly, it is important to understand that the jurisdictions, including India, that have joined the group and committed to an early adoption of the standard developed by OECD and the G-20, have set out an ambitious timetable. The standard referred to is the global standard for automatic exchange of tax information that was agreed to at the G20 finance ministers meeting in February 2014. This was followed by the endorsement of the standard in the G20 finance ministers meeting in Cairns in September. At the October 29 meeting at Berlin, 51 jurisdictions signed the first ever multilateral competent-authority agreement to automatically exchange information; incidentally, the US is not part of this grouping. The only legal implication of this development is that the exchange of information would be more efficient and would supplement the mechanism for information exchange under bilateral treaties. The standard agreed by G20 (which India is party to) stands insofar as commitment to implement and begin exchanges in 2017 or end-2018.

There is no gainsaying India’s commitment to cooperate; the government’s decision to put off India’s participation at the OECD/G-20-endorsed multilateral standard for ‘automatic exchange for financial account information’ ought to be seen as a move to buy time, whilst the executive and the judiciary agree on a more convergent position. In summary, no big deal!

The author is Partner, BMR Legal. Views are personal