on flow-funds-tax-haven-india
Post on 21-Nov-2014
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FINANCIAL FLOWS FROM
INDIA
REGULATE, MONITOR
AND
INVEST BACK
Tax agreements-1
• Government of India has resolved to unearth
unaccounted money parked outside India. The
steps being taken include amending the Income
Tax Act, 1961 to enable the Central Government to
enter into agreements with non-sovereign
jurisdictions also for exchange of information and
other purposes.
• Steps have already been initiated for negotiations
for entering into agreements for the exchange of
information with other nations and renegotiation of
the double tax avoidance treaty with Switzerland is
in process.
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Tax agreements-2
• India participates in the global efforts to facilitate exchange
of tax information and to take action against tax evasion.
These efforts need to be strengthened to eliminate
opportunities for investment of wealth earned through
corrupt activities and prevent corrupt practices.
• Financial Action Taskforce (FATF) on money laundering
recommendations enables on combating money laundering
mandate compliance with certain international cooperation
standards. India worked towards full membership of the
FATF which makes it mandatory for the country to revisit its
policies in this regard.
• India assists the World Bank in realising its Governance and
Anti-Corruption Strategy in its Indian projects.
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In different locations of the world, about 70 odd
small territories endeavor to attract investment from
outside their border offering financial secrecy
laws. These are commonly known as “tax havens”,
because they also impose little or no tax on income
from sources outside and are ideal lodges for black
money of many countries. Switzerland is a major
tax haven with more than a third of global private
funds deposited in its banks.
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• Recently, secret banking and tax havens
became the target of Germany and France,
and later the UK and USA. These nations have
begun a crusade against tax havens and,
especially, against Switzerland.
• This new development opens up a great
opportunity for India, which has been a victim
of flight of capital to tax havens and secret
banks.
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There is a difference between black money within
the country and the black wealth shifted out of
India. While both are bad and are prejudicial to
the national economy, the black wealth stashed
out of India represents capital flight from India. It
is a total loss to the nation. On black money the
government and the people lose the tax. But in
capital flight the country itself loses the money.
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Any measure to recover the monies stashed away
from the country requires strategic approach
combining geo-political diplomatic action at
the global level and developing appropriate
infrastructure in India to bring it back. This effort is
needed not only to protect the national economic
interests, but also to ensure that the secret channels
are not made use of to fund anti-national work
including terror.
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The government is negotiating Double Taxation Avoidance
Agreements (DTAA) with different tax havens and making
provisions for clauses under which the governments and
banks could be compelled to disclose the account details.
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Financial Intelligence Unit (FIUs)
• India is a member of Egmont Group, which is an
international body to stimulate cooperation amongst
Financial Intelligence Unit (FIUs) across the globe.
• FIU-India was made a member of the Egmont Group
at its recent Plenary Session at Hamilton, Bermuda
after verification of the FIU India’s operational status
and ability to share information with foreign FIUs.
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• The Egmont Group membership, apart from
meeting an important requirement of Financial
Action Task Force (FATF), will facilitate and
enhance the exchange of information by FIU-India
with other FIUs.
• Admission of FIU-India into the Egmont
Group is a major step forward for India to join the
international community in its fight against money
laundering and financing of terrorism.
11
India has signed DTAA with 77 countries (by 2009)
“ I have asked the revenue dept. to reopen
negotiations for all 77 DTAAs with all the
countries that we have entered into so far, so
that we can have real time exchange of
information on tax evasion and tax avoidance.”
Pranab Mukherji had said. In Nov. 2009.
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• The Govt of India has signed a protocol with the
Govt of Switzerland in August 2010.
It is signed to enable India to deal with Swiss bank
accounts of Indian tax evaders so as to collect due
taxes.
After legal requirements are met and Swiss
Parliament approves notifications the protocol will
take effect.
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FIVE-PRONGED strategy adopted to curb the
menace of illicit funds.
1) Joining Global Crusade Against 'Black Money':
India becoming Vice Chair of the Peer Review
Group of the Global Forum on Transparency and
Exchange of Information for Tax purposes does not
indeed make India a crusader. We do have live
examples of what may constitute a 'crusade'. A
simple reference is required to be made to what the
Obama Administration has done to UBS and other
banks in various tax havens. It has also come out
with a new tax law which imposes severe penalty
for tax evaders, routing their income to tax havens.
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We have examples like Germany and UK which
have truly launched a crusade against tax evaders
and also recovered huge revenue. It would indeed
be too naive to say that by becoming a Member of
Financial Action Task Force and the Task Force on
Financial Integrity and Economic Development,
India's stature has risen to the level of a black
money crusader. All such memberships are
institutional arrangements towards sharing
information but acting on them requires a different
set of political priorities which should be clearly spelt
out by the UPA Government.
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2) Creating an appropriate legislative framework:
On this front, multiple efforts may be seen but no concrete
step has been taken to design a web of legislative tools to
curb generation of black money and ensure recovery of
untaxed wealth vaulted in some tax havens. True, a significant
step has been taken after G-20 Summit in 2009 to amend the
DTAAs but obtaining information is just the first step towards
zeroing in on possible tax evaders. Substantiating evasion in
such cases and then recovering taxes require many more
legislative legs to walk across to success. All the steps
enumerated by the FM like TIEAs, PMLA, TP provisions etc
are not adequate for successful recovery of the lost wealth.
Criminal aspect of tax evasion calls for a hard look at the
entire platter of legislative tools available to the taxmen.
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3) Setting up institutions for dealing with Illicit
Funds: Steps taken so far to create a network of
ITOUs is indeed a laudable decision. However, key to
success is the consolidation and integration of
networks to produce the desired results in time-
sensitive paradigm. The existing setup in CBDT and
the creation of dedicated exchange of information unit
will not suffice. A dedicated R&D unit would be
required to identify the loopholes in the DTAAs so that
they could be plugged in. A close watch and study of
legislative measures being taken in other economies
would help. A sharp eye on the changing business
contours of MNCs and the complex architecture of
financial transactions may help detect cases like
Vodafone.
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4) Developing systems for implementation:
Some of the steps suggested by the Finance
Minister are indeed commendable. But a
scientifically-prepared HR database is the need of
the hour. The CBDT needs to list out qualities
required in officers for this specific type of
assessment and investigation. Merely posting
officers who had done some stints either with the
FT & TR and Directorates of TP and International
Taxation would not be enough. There could be
hundreds of other officers in the field who may be
more suitable for this sort of job. The Board simply
needs to transparently develop parameters to
achieve this goal.
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Strengthening TP Audit is fine but the quality of
DRP orders needs greater attention of the Board
(a detailed piece may follow later on this issue).
Handling mega revenue cases before various
courts of law calls for better vision and sincerity
which appears to be glaringly lacking today.
There are hundreds of TP and International
Taxation cases, which call for in-depth study by
policy makers, and also a hardened approach to
defend the Revenue.
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5) Imparting skills to the manpower for effective
action: On the front of preparing manpower for
detection of frauds in cross-border transactions,
merely training a few dozens officers overseas will
not do. A long-term strategy to create suitable
infrastructure at NADT with quality faculty would help
more. If need be, some foreign faculty can be hired
for periodic training sessions. The Board can use the
huge wealth of retired officers who can be of great
help to the cause of Revenue.
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