The fiscal year 2011-12 will go down in India's financial history as a year in which black money stashed in Swiss banks became a big enough issue to rouse the public conscience for demanding swift and stern action for retrieving the money lost in tax havens. Baba Ram Dev and Anna Hazare kindled the fire and the Supreme Court further stoked the fire by calling it “Plunder of the Nation”.

The Government was forced to come up with a response detailing the measures taken to fight the menace. It explained that India has joined the global crusade against black money and will create a legislative frame work for this purpose. Institutions have been set up to deal with illicit funds. A new manpower policy is being brought out. There will hereafter be constant training for skill development.

India has joined the Task Force on Financial Integrity and Economic Development in the hope that it will help India build the capacity to trace terror funds and to successfully investigate and prosecute money-laundering and terrorist-financing offences.

India insisted at the G-20 summit that countries should enter into Tax Information Exchange Agreements wherever required. Accordingly, India has so far completed negotiations of 22 new Tax Information Exchange Agreements with various tax havens. New Double Taxation Avoidance Agreements have been finalised for incorporation of Tax Exchange Information provisions. The revised agreement with Switzerland will allow India to obtain banking information from Switzerland in specific cases from April 1, 2011.

General Anti-Avoidance Rule has been incorporated in the Direct Taxes Code to deal with aggressive tax-planning devices meant to circumvent tax laws. Existing transfer pricing provisions have been remodelled on the basis of the law prevailing in developed countries and these changes will meet the challenges of a growing intangible economy and complex cost-sharing arrangements. The Prevention of Money Laundering Act was amended to expand the predicate offences substantially. This amendment will widen the scope of money-laundering investigations.

Will these agreements help?

Critics are not wanting in pointing out that too much reliance on Exchange Information Agreements will not be of much help. A former Joint Secretary to the Central Board of Direct Taxes points out inherent limitations of the system in place.

The Information Exchange Agreements do not provide for automatic or spontaneous exchange . None of our tax agreements will permit “fishing expedition”.

But then, as a first step, the Government is right in highlighting that the Income-Tax Department has collected 7,704 discrete items of information from treaty countries containing details of payments received by Indians in various countries, besides information on accounts in Liechtenstein's LGT Bank.

More than 175 requests have been made to our treaty partners in case of specific tax payers in the last financial year. Efforts to prevent new ways of transferring illicit funds outside the country through mis-invoicing resulted in detection of mis-pricing of Rs 33,784 crore in the last two years. It has been repeatedly pointed out that illicit funds are ploughed back into the Indian financial system as ‘hot-money' flows through available channels like participatory notes, which currently account for 16 per cent of the assets under the custody of the FIIs in India.

Such channels are said to be used to raise funds from our capital markets to finance terrorism and other criminal activities. A word from the Finance Minister that participatory notes will be banned will significantly arrest the flow of such illicit funds into our stock markets.

An Indian Amnesty?

Ever since the US and the UK announced their amnesty schemes, pressure has been mounting on India to come up with an amnesty scheme to bring back secret moneys in foreign accounts.

Industry captains like Mr Ratan Tata, Mr Y.C. Deveshwar and Mr N.R. Narayana Murthy have been urging the Government to devise an amnesty scheme mainly for funding investments into the infrastructure sector, which requires over $1 trillion over the next Plan period.

(The author is a former Chief Commissioner of Income-Tax.)