SC axe on offshore money Questions arise in the context of India’s obligations towards its tax treaty partners

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Questions arise in the context of India’s obligations towards its tax treaty partners

On May 1, the Supreme Court ordered reconstitution of the Special Investigation Team (SIT) for a comprehensive probe into the infamous black money petition. Cutting through all administrative and procedural cobwebs, the apex court went ahead and named retired Judges M B Shah and Arijit Pasayat as members, negating the government’s plea for a review. The first report of SIT has to be submitted to the court on August 20, 2014.

In the proceedings that commenced in 2009 in pursuance to a petition filed by senior advocate and Parliamentarian Ram Jethmalani, the court was critical of the government’s inactions, expressed anguish on resorting to delay tactics to implement its 2011 order and felt that the three-year procrastination was unacceptable. Thundering at the law officer, the Bench observed that not complying with its order was nothing short of contempt.

This development has reignited the debate, and on this occasion, the apex court is determined to take it to its logical conclusion. The SIT’s task is not going to be simple as it will have to deal with not just a tax evasion matter but also other forms of economic offences for violations under exchange controls and possibly corruption law. Finally, the SIT can’t lose track of India’s obligations under international tax treaty law and other forms of cross-border laws on economic offences, including banking secrecy.

The debate assumes significance in the light of global organisations such as Organisation for Economic Co-operation and Development (OECD), G-20 calling for transparency, automatic exchange of information and stringent laws to prevent laundering of money with India spearheading the tax transparency forum at the OECD level. In my view, this debate is beyond unaccounted wealth (of Indians) that has escaped taxation. To put this in perspective for India, it raises deeper questions on morality and offences beyond tax, given the intervention by the highest court of law. This is unprecedented in the context of rich nations where the debate is in the context of tax evasion given that the world has moved ahead in acting swiftly on other forms of serious offences such as terrorism, drug trafficking, etc.

So what does this mean to the government?

A complex web of questions arise in the context of India’s obligations towards its tax treaty partners. The Department of Revenue has taken a plea of ‘secrecy’ clause under Article 26 of the treaty as the key reason for non-disclosure of information.

The SC, in its July 2011 order, refuted such reasoning arguing that Article 26 permits disclosure in ‘public court proceedings’. It further went on to analyse the Vienna Convention on Law of Treaties to state that the public court proceedings would include all types of proceedings and would not be restricted to tax matters.

The apex court has highlighted rights guaranteed under Article 32 of the Constitution of India and held that India cannot be permitted to have treaties, which transgress upon the boundaries erected by our Constitution. Whereas, I feel this is an overwhelming argument, the tax administration will still have to battle with the interpretation of the treaty clause including supplemental ‘tax treaty information exchange’ agreements, if any, India has signed with treaty and non-treaty partners. It would otherwise be an academic exercise to satisfy the apex court’s directive. I doubt if the court intended to lay down a law on the supremacy of the Constitution over international conventions. Nevertheless, this principle will be tested and SIT’s report will be keenly awaited by civil societies across the globe.

Interestingly, the finance minister has lately activated exchange letters with his Swiss counterpart on the exchange of information, which the Swiss have refused to share, citing reasons under their domestic laws and denying request for information relating to ‘stolen’ data. For the finance ministry, it now finds itself between the devil and the deep sea. It will be interesting to follow this development after Parliament is reconstituted.


Mukesh Butani is Managing Partner, BMR Legal.
Views are personal
(with inputs from Rahul Aggarwal, research associate)


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