It pays to train investigators

MOHAN R. LAVI | Updated on June 09, 2011 Published on June 04, 2011

The Government has enough ammunition at its command to punish tax evaders. Tardy implementation would be the biggest risk factor.

It is said that money is the opposite of the weather since nobody talks about it but everyone does something about it. Black money could well be the contrarian to this rule since everyone talks about it, but only Governments can do something about it.

Hunger strikes, reprimands from the apex court and a sudden awakening of the nation treating this as a national calamity have prompted the Government to set up a committee in collaboration with reputed economic institutes to prepare a report within six months on the subject with a three-point agenda - examine ways of strengthening laws to curb generation of illegal wealth, prevent transfer of such funds abroad and devise a framework for recovery of unaccounted assets.

The key would be to complete the study within the time-frame as delays would only give more time to the targets to move the slush funds.

Much water has flown down the Ganges since the Wanchoo Committee suggested in the early seventies certain palliatives like demonetisation of high-value currency units , ceiling on cash holdings and acquisition of immovable property in case of understatement of purchase consideration.

Many Voluntary Disclosure, gold and pre-emptive purchase of property schemes have only scratched the surface of the issue. There is enough historical evidence to prove that most of the slush funds can be traced to certain sectors of the economy - realty and the bourses would occupy pivotal positions.

The tax department steps in after a scam has been unearthed to claim its pound of flesh. But an over-burdened and gullible judiciary moves at snail's place - it took ages for the tax department to get their dues from the Harshad Mehta scam.

Lifting secrecy veil

Secrecy laws in tax jurisdictions abroad ensure that the tax department gets scanty information about slush funds parked abroad. A G-20 meeting and the Pittsburgh Summit which were held in quick succession in 2009 resolved to take this issue head-on by voting for delivering an effective programme of peer review, capacity building and counter measures to tackle non-cooperative jurisdictions that fail to meet regulatory standards.

As a result, all the tax havens have now agreed to end the bank secrecy. They have also agreed for not applying the principle of dual criminality (trials in multiple countries) while exchanging information for tax purposes.  Countries are also willing to enter into Tax Information Exchange Agreements (TIEA) in the absence of a tax treaty.

The Government has amended DTAAs with about 40 countries and TIEAs with prominent tax havens such as Isle of Man, Bermuda and Bahamas including a clause on information regarding banking sector. Attempts have been made by the Government to scuttle ingenious and innovative transfer pricing plans to transfer money abroad.

Provisions of DTC

Efforts to catch the guilty and punish them would be robust legislation. The Direct Taxes Code (DTC) takes some steps towards this by proposing that for the purpose of levy of wealth tax, taxable assets have been defined to include deposits in banks located outside India in case of individual, unreported bank deposits in case of others, interest in a foreign trust or any other entity (other than foreign company) and any equity or preferential shares held in a controlled foreign company.

The General Anti-Avoidance Rule (GAAR) has been incorporated to deal with aggressive tax planning devices used to circumvent tax laws and Specific Controlled Foreign Company (CFC) rules have been incorporated to bring to tax passive income earned by residents from substantial shareholding in companies situated in low tax jurisdictions.

The report, along with the provisions of the DTC, can give enough ammunition to the Government to punish the evaders. Tardy implementation would be the biggest risk factor in this effort as there could be serpentine money trails, non-existent names and iffy agreements created with the specific intention of wrong-footing an investigator. Training investigating officials in the nuances of international finance and hawala rackets would be an invaluable investment.

(The author is a Bangalore-based chartered accountant.)

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Published on June 04, 2011
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