Tax evaders cannot escape easily

The government’s grip over information is tightening not only in respect of transactions undertaken within the country but also overseas

In a liberal economic and low tax rate environment, people are expected to go straight. Tax fraud and tax evasion deprive governments of revenues needed to restore growth and at the same time jeopardise citizens’ trust in the fairness and integrity of the tax system. While the Indian government is building up the information gathering and monitoring system in-house, there are constant efforts, at international level too, for co-operation and exchange of information.

In the G-20 summit concluded in November 2014, the countries have endorsed the global Common Reporting Standard for Automatic Exchange of Information (AEOI) with a view to ensure the fairness of the international tax system and to secure countries’ revenue bases. During the summit, Indian Prime Minister urged every jurisdiction, especially tax havens, to provide information for tax purposes in accordance with treaty obligations and the country committed to signing of Multilateral Competent Authority Agreement (MCAA), which is a prelude to an annual automatic exchange of information between the governments. India has joined the MCAA on AEOI on 3 June 2015, in Paris, France, along-with Australia, Canada, Costa Rica, Indonesia and New Zealand.

For implementation of these standards in India and with a view to provide information to other countries, necessary legislative changes have been made through Finance (No. 2) Act, 2014, by amending section 285BA of the Income-¬tax Act, 1961 (‘the Act’). AEOI based on MCAA, when fully implemented, would enable India to receive information from almost every country in the world, including offshore financial centres and would be the key to prevent international tax evasion and would be instrumental in getting information about assets of Indians held abroad including through entities in which Indians are beneficial owners. The endeavour is to begin the exchange of information automatically amongst the 94 jurisdictions by 2017-18, subject to domestic implementation of requisite legislative procedures.

Foreign Account Tax Compliance Act (FATCA)
FATCA, an initiative of US government, compels foreign governments and banks to report bank accounts of entities in which US taxpayers hold a stake. FATCA has fathered a growing global consensus on attacking the off-shoring of illegal wealth. More nations and financial institutions have volunteered to comply, considering draconian fallouts, as the US government will levy a 30% tax on everything flowing from US to a non-compliant institution. Indian Government is also to sign FATCA with US effective September 2015, which is expected to result in additional data flow.

Indian Efforts to curb tax evasion

The Black Money Bill
The Undisclosed Foreign Income & Assets (Imposition of Tax) Bill, 2015 (UFIA) has become law of the land as it receives President’s assent on 26 May 2015. The consequences of non-compliance and oversight, under the Black Money Bill are severe from huge tax to high penalties and prosecution. Prevention of Money Laundering Act (PMLA), 2002 now includes offence of tax evasion under the proposed legislation as a scheduled offence under PMLA. Sub-section (6) of section 195 of the Act has also been amended to require the remitter to report all foreign remittances irrespective of whether these remittances are subject to tax in India or not.

Tax Information Exchange Agreement (TIEA)
Over 500 TIEA signed all over the world and India has over 15 effective TIEA.  India is in negotiations with over 75 countries to broaden the scope of Article containing Exchange of information to specifically allow for exchange of banking information.

Notified Jurisdictional Area (NJA)
Section 94A was introduced in Finance Act 2011, which empowered the government to notify any country, which does not help India in Tax Information Exchange as a Notified jurisdictional Area (NJA) u/s 94A.  In November 2013, Indian government notified Cyprus as a NJA.  The Section was introduced to discourage transactions with countries that do not have an effective tax information exchange systems with India.

Manual on Exchange of Information
The Foreign Tax & Research division of Central Board of Direct Taxes (CBDT) recently released Manual on Exchange of Information (EOI). This Manual is a comprehensively revised document that provides detailed guidelines for framing requests for information under the provisions of tax treaties, as also guidelines for providing clarifications and feedback that would facilitate the receipt of information or evidence.

So can one hold assets outside India?

There are legal ways of remitting money and holding assets outside India. India is persistently poignant on the path of liberalization, by opening up its markets and loosening its controls over economic and financial matters. Under the Liberalised Remittance Scheme (LRS), all resident individuals, including minors, are allowed to freely remit up to $250,000 per year for any permissible transaction. Any Indian resident individual can hold assets abroad acquired from money remitted under LRS for the permitted transaction. An Indian company can make direct investment in a joint venture (JV) or wholly owned subsidiary (WOS) outside India as per the Overseas Direct Investment (ODI) Guidelines.

The climate is heating up and the Government’s grip over the information is tightening not only in respect of the transactions undertaken within the country but also international ones. Over the next two years, the Indian Government is likely to have full control over the situation as the environment is shifting from opaque to transparent even on the international transactions wherein hundreds of jurisdictions would go out of their way to cooperate with each other in this regard.  One cannot really afford to be casual in one’s approach to comply the law. Truly ‘Gone are the days where offences would go undetected’.

(Neeraj Sharma is Partner at Nangia & Co.)