It is plunder of India's economy, cried the Supreme Court in anguish. $500 billion; $640 billion, Rs 33 lakh crore per annum. These are figures of illicit money estimated by different institutions and personages as taken out of India. Mr Raymond Baker, Director of Global Financial Integrity of Washington DC, estimates that between 2004 and 2008, approximately $89 billion was moved out of the country through mispriced trade alone. Tax evasion represented by money taken away from India is estimated by him at half a trillion dollars from 1948 to 2008.

A decade back, nations got alerted about the mis-invoicing racket concerning exports and imports and formed an organisation known as ‘Honesty International' at Geneva to oversee the way trade prices are handled from various countries. According to the Top Enforcement Directorate Officials, the latest method is to make use of Participatory Notes. Over 55 per cent of foreign institutional investments totalling $85 billion were made through the Participatory Notes route in 2009-10.

P-notes are derivative instruments based on Indian securities issued by FIIs to those investing indirectly in the bourses. No mechanism exists in India to pinpoint the source of these funds. The Reserve Bank of India has urged the Finance Ministry to ban these P-notes. The Securities and Exchange Board of India has asked the FIIs issuing PNs to report these activities and unravel the concept of beneficial owner.

Global phenomenon

Tax evasion through parking funds in offshore tax havens is a global phenomenon. Many countries have signed information exchange agreements with the tax havens. According to the OECD, Germany collected $5.4 billion from offshore evaders, the UK $810 Million, France $1.3 billion, and Italy $6.7 billion.

The US pressured the Swiss bank to disclose the names of American accountholders. Till 2010, according to the Global Financial Integrity, India has not signed a single tax information exchange agreement to bring back black money from abroad. Despite double tax avoidance agreements with 79 countries, it has been able to achieve nothing.

The new Chairman of the Central Board of Direct Taxes, a resolute and dynamic officer, has taken it upon himself to ink the tax information exchange agreements with 22 countries.

A group of 14 enlightened citizens addressed an ‘Open letter' to political eaders expressing alarm at the ‘governance deficit; in government, business and institutions.

Intelligentsia's Initiative

“Among several urgent steps needed, said the group', the most critical was to make the investigation agencies and law-enforcing bodies independent of the Executive'. The group included grey eminences such as Mr Azim Premji, Mr Bimal Jalan, Mr Deepak Parekh, Mr N. Vaghul, Justices Mr Virava and Mr Sri Krishna, Mr Malegam and Professor A.Vaidyanathan.

Agencies such as the Central Bureau of Investigations, Enforcement Directorate and the Indian Revenue Service are all under the control of government departments. The IRS in India has nothing in common with its counterpart in the US. The original draft of the DTC attempted to pull down the status of the IRS and make it subordinate fully to the Finance Ministry. Saner counsel prevailed and the present Finance Minister restored the status of the IRS as it has been functioning hitherto.

DTC provisions

Chapter XX of the Discussion Paper on the DTC declares eloquently that provisions have been included in the Code to ensure certainty of punishment upon non-compliance of tax laws.

To provide deterrence against non-compliance, the Code lays down measures for prosecution of offences of a serious nature. There is also a provision for compounding of an offence. It is amazing that the term ‘concealment' which has been holding the field for more than half a century in the tax law relating to penalties finds no mention in the DTC. Instead, the DTC uses the term ‘under reporting' of the tax base and undisclosed tax-base.

The Supreme Court has been struggling to define concealment in such cases like Atul Mohan Bindal 317 ITR-1, Gold coin Health 304 ITR 308 (FB). Virtual Soft Systems Ltd., 289 ITR 83, Dharmendra Textiles 306 ITR 277, Saheli Leasing Industries 324 ITR 170 and Ashok 292 ITR 11. The debate centred on wilful concealment. The DTC throws the debate wide open afresh.

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