The fig leaf of confidentiality

Dawood henchman and sharpshooter Abu Salem was handed over to India by Portugal, where he was a fugitive, reportedly on a stiff condition — he would not be handed down death penalty, the ultimate punishment reserved by the Indian criminal law in the rarest of rare cases.

Abu Salem was allegedly the mastermind of the Mumbai blasts that took away thousands of innocent The fact that in Portugal there is no death penalty appears to be a plausible argument even if he himself may be guilty of snuffing out thousands of innocent lives, and even if the country where he carried out the diabolical act punishes similar crimes with the same penalty.

The Indian government, however, has been pilloried for kowtowing to the wishes of Portugal. Juxtapose this with t the so-called confidentiality clause in the Double Taxation Avoidance Agreements (DTAA) that India has signed with a number of countries obliging it not to go public with disclosure of names of those who have stashed away their wealth abroad after having earned them in India.

The UN and OECD models

DTAAs have had a hoary origin. Catching hold of economic criminals was perhaps peripheral to the whole exercise, with the main purpose being to address the problem of multiple jurisdictions. DTAAs came to address the festering dichotomous problem of source vs resident rule of taxation.

Briefly, the UN model sets store by the source rule and the OECD model is skewed in favour of the residence rule. India by and large plumps for the UN model though it has had to yield to the residence rule in the face of powerful interlocutors such as the US. DTAAs are thus essentially bilateral in nature, hammered out in a spirit of give and take with the dominant party often giving less and taking more.

When the German government recently disclosed to the Indian government the names of some 26 businessmen alleged to have stashed away funds in LGT Bank of Liechtenstein, the Indian government's refrain was it was bound by the confidentiality clause that prevented it from going public with the names. One doesn't know which confidentiality clause the government was referring to because for one we do not yet have a DTAA with Liechtenstein. We want to stitch up a limited Tax Information Exchange Agreement (TIEA) with that country bordering Switzerland whose banking secrecy laws seem to have rubbed off on to it. But Liechtenstein is insisting on a full-fledged DTAA.

India believes that the more limited TIEA is enough to tame crooks and deviants. Accordingly, it has completed ten such agreements including with Bahamas, Bermuda, British Virgin Islands from out of the 22 tax havens identified thus far. And if the reference is to the Indo-German DTAA, there seems to be nothing in it restraining the Indian government. It only fosters the view that if public interest outweighs reasons of privacy, then the contracting states can go public.

Confidentiality clause

The confidentiality clause in the UN model reads as under: Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State. However, if the information is originally regarded as secret in the transmitting State, it shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection or the enforcement or prosecution in respect of or the determination of appeals in relation to the taxes which are the subject of the convention. Such persons or authorities (including courts and administrative bodies) …..shall use the information only for such purposes but may disclose the information in public court proceedings or in judicial decisions. Much the same is said by the OECD model. The UN and OECD models at best serve as guideposts which is perhaps why the Indo-Swiss DTAA gives Switzerland a little elbowroom — while granting the power of the Indian government to share the secret information with assessing officers and courts, it is delightfully vague about the power of such officers and courts to go public in turn.

The Indian government should make bold to disclose the names of persons involved in banking and tax shenanigans, and not use the so-called confidentiality clause in the relevant DTAA as a fig leaf. In the various versions of tax amnesty schemes the Indian government has unfolded thus far, confidentiality, apart from soft rate of tax, was the bait. But the Indian government's hands are not similarly tied when ill-gotten wealth stashed away abroad is notified to it by the government of the latter.

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

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