To bring all that black money back

The disclosure of the names of Indians who have stashed tax-evaded money in foreign banks is once again in the news.

Finance Minister Arun Jaitley had argued that the premature and out-of-court disclosure of names could jeopardise investigations and it could be difficult for the Government to obtain cooperation from (current and prospective) reciprocating countries in the future.

The minister had said the Government is “not going to be pushed into an act of adventurism” as it may violate the “confidentiality clause” under Double Taxation Avoidance Agreements (DTAAs) signed with other countries.

Though the Government has adhered to the Supreme Court’s directive, the minister’s stand was echoed by Attorney General Mukul Rohatgi, citing concerns raised by reciprocating countries. Such a stand does not appear to be very different from the one taken by the UPA government.

The Government’s stand raises questions about India’s DTAAs — whether it serves our national interest, particularly in our fight against illegal money stashed abroad. The ‘confidentiality clause’ and other privacy rules embedded in the DTAAs, appear to be major hindrances to being more open and transparent about fiscal offenders.

Bilateral DTAAs aim to serve our economic and strategic objectives of promoting foreign trade and investments by defining and simplifying matters related to taxation of income, assets, and financial transactions between two jurisdictions. The agreements also generally include provisions relating to cooperation in cases of fiscal evasion. India currently has 88 DTAAs, of which 85 are in force.

Do such tax agreements actually serve to facilitate trade and investment flows between countries? Do they strengthen or undermine the domestic tax statute?

If the ‘confidentiality clause’ is binding, does it also simultaneously facilitate automatic information exchange on tax evaders without the Government making explicit efforts to do so?

The quantum of tax-evaded money being huge (estimates by Global Financial Integrity puts India’s total illicit financial flows in the 10-year period between 2002-11 at $344 billion), and India’s tax to GDP ratio being among the lowest in the world, do the provisions of the agreement also serve our fiscal interests?

Economist Arindam Das-Gupta notes that FDI flows to low-income, capital-importing countries are likely to be insufficient to justify losing revenue from DTAAs. This is because the revenue costs incurred due to substitution of residence-based taxation for source-based taxation of capital income such as interest, dividends, royalties and capital gains may be substantial, unlikely to be compensated by additional FDIs.

The emergence of tax havens and offshore financial centres (OFCs) have resulted in substantial fiscal revenue losses on cross-border transactions due to large-scale tax avoidance practices through round-tripping, treaty shopping and thin capitalisation. The all-too familiar ‘Mauritius route’ has enabled companies to completely avoid capital gains tax.

It is therefore important that provisions in the DTAAs are not exploited in a way that it leads to double non-taxation. Postponing implementation of GAAR (general anti-avoidance rule) till April 2016 points to weak political will to incorporate defensive mechanisms.

The provisions of India’s DTAAs generally override those of the domestic statute.

Under Section 90(2) of the Indian Income Tax Act, an assessee has an option of choosing to be governed either by the provisions of particular DTAA or the provisions of the Income Tax Act, whichever are more beneficial.

The supremacy of DTAA provisions over domestic legislations has led to large-scale abuse through avoidance. Clearly, such agreements need to be renegotiated, and the sanctity of the domestic tax statute needs to be restored.

The pecuniary and non-pecuniary costs of ambiguous, non-transparent provisions in DTAAs may be large, as evidenced in the Vodafone-Hutch deal case which involved the India-Cayman Island DTAA.

Rather than go on a signing spree, the Government should, on a case-by-case basis, evaluate the real benefits of DTAAs accruing to the country.

The writer is an assistant professor at IIM-Ranchi. The views are personal