Published Editorial

Look beyond the black money SIT

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Financial Express


Rajendra Nayak
Partner, International Tax Services

As the world becomes increasingly globalised, it is becoming easier for taxpayers to make, hold and manage investments through financial institutions outside of their country of residence. Vast amounts of money are kept offshore and go untaxed to the extent that taxpayers fail to comply with tax obligations in their home jurisdiction. Offshore tax evasion is a serious problem for jurisdictions all over the world. In India, black money—in the international context generally equated with tax evasion—refers to funds earned on the black market, on which income and other taxes have not been paid.

In a significant development, in light of the directions of the Supreme Court, the government has constituted a Special Investigation Team (SIT) for unearthing black money. The SIT has been charged with the responsibility and duties of investigation, initiating of proceedings and prosecution in matters involving unaccounted money. The constitution of the SIT can be traced to the writ petition filed by noted jurist and former law minister Ram Jethmalani in the Supreme Court seeking the court's directions to help bring back black money stashed in tax havens abroad and initiate efforts to strengthen the governance framework to prevent further creation of black money. While the constitution of the SIT is welcome, the government may need to consider a number of other legislative and administrative measures to achieve the objective of preventing further creation of black money.

Cooperation between tax administrations is critical in the fight against tax evasion and in protecting the integrity of tax systems. A key aspect of that cooperation is exchange of information. In a recent development, the OECD, working with G20 countries, which includes India, has developed a global standard for automatic exchange of financial account information. On April 19, 2013 the G20 finance ministers and central bank governors endorsed automatic exchange as the expected new standard. The G20 decision followed earlier announcements by a number of European countries of their intention to develop and pilot multilateral tax information exchange based on the Model Intergovernmental Agreement to Improve International Tax Compliance and to Implement Foreign Account Tax Compliance Act (FATCA), developed between these countries and the United States.

The standard consists of two components: a) the Common Reporting Standard (CRS), which contains the reporting and due diligence rules and b) the Model Competent Authority Agreement (CAA), which contains the detailed rules on the exchange of information. The CRS describes the due diligence procedures that must be followed by financial institutions to identify reportable accounts. Before entering into a reciprocal agreement to exchange information automatically with another country, it is essential that the receiving country has the legal framework and administrative capacity and processes in place to ensure the confidentiality of the information received and that such information is only used for the purposes specified in the instrument.

Automatic exchange of information involves the systematic and periodic transmission of “bulk” taxpayer information by the source country of income to the country of residence of the taxpayer concerning various categories of income or asset information. The information which is exchanged automatically is normally collected in the source country on a routine basis, generally through reporting of the payments by the payer (financial institution, employer, etc.).

The G20 has given a mandate to the Global Forum on Transparency to help developing countries identify needs for technical assistance and capacity building, working together with the OECD Task Force on Tax and Development, the World Bank Group and others. Related to this mandate is the call by the G20 to its Development Working Group to deliver a roadmap by September 2014 showing how developing countries can overcome obstacles to participation in the automatic exchange standard and to assist them in meeting the standard.

The Indian government should now look at the next steps for implementing the standard for automatic information exchange. Implementation of the standard will require translating the CRS into domestic law. Signing a CAA based on the model then allows putting in place the information exchange based on existing legal instruments. The exchange of information could also be implemented on the basis of a multilateral competent authority agreement, or jurisdictions could enter into a multilateral intergovernmental agreement or multiple intergovernmental agreements that would be international treaties in their own right, covering both the reporting obligations and due diligence procedures coupled with a more limited CAA.

Automatic exchange of information can provide timely information on non-compliance where tax has been evaded either on an investment return or the underlying capital sum. It can help detect cases of non-compliance even where tax administrations have had no previous indications of non-compliance. It has deterrent effects, increasing voluntary compliance and encouraging taxpayers to report all relevant information.

In addition to implementing automatic information exchange, the government should also consider the proposals contained in the White Paper on Black Money released by the finance ministry in May 2012. The paper suggests measures such as reducing disincentives against voluntary compliance by rationalisation of the tax rates, reducing transactions costs of compliance, further economic liberalisation, reforms in vulnerable sectors such as financial services, real estate, natural resources and bullion, creating an effective deterrence and creating public awareness and public support.

While constituting the SIT represents a step in the right direction, a number of other initiatives may need to be considered to supplement the work of the SIT to effectively curb the menace of tax evasion and black money in India.