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Black money debate degenerating into a farce?

Moneys parked in secret accounts in tax havens is not a mere tax evasion issue.

“It is respectfully submitted that due to increasing globalisation, it has become easier for taxpayers to make, hold and manage investments through financial institutions outside of their country of residence. Therefore, vast amounts of money are kept offshore and go untaxed to the extent that tax payers fail to comply with tax obligations in their home country.”

Now, this is not a lecturer of finance in High School pointing out to his student on the downsides of global financial architecture.

Rather, this is the preliminary submission of Government of India in a Writ filed last week with the Hon’ble SC. It is apparent from this submission that the government views the issue of money parked in secret accounts in tax havens solely as tax issue; to be sorted out by the tax man through the tax laws.

At the core of the misunderstanding of this issue is our inability to distinguish between Black Money [where buccaneers have not paid tax on such income] and Red Money where the source of such income itself is illicit and hence the owners seek to secret the amounts for obvious reasons.

Put pithily, the issue with Red Money is that it is invariably a by-product of drug running, illegal weapons sale, terror or corrupt money. Consequently, the owners seek to disassociate with the same fearing the penal consequence of such income and not – repeat not – taxes. Taxes is a minor irritant when it comes to Red Money.

Therefore to club Red Money – the higher of the two evils – with Black Money and thereby treat the entire issue of moneys parked in secret accounts in tax havens as a mere tax evasion issue when larger questions of the source of such income remains unanswered, is complete dilution of a serious issue.

But Why this debate on DTAA?
But if this up-front dilution shocks you, the repeated reference to Double Taxation Avoidance Agreement [DTAA] in this debate will stun you.

DTAA, as readers would know, is an agreement between two sovereign countries to ensure that income in one country to a tax payer in another is not taxed in both countries Viz., the country where the income originates as well as the country of residence of the tax payer.

Therefore, DTAA ensures that either the income is taxed in country of origin or in country where the tax-payer is resident. Thus, readers may note DTAA involves genuine tax payers having legitimate income and not to those who possess illicit income.

Just as a tax-payer is entitled to confidentiality of his income and taxes paid within a country, every DTAA provides clause for confidentiality of the information so exchanged between the two countries.

Article 26 of the DTAA between India and Germany deals with the issue of confidentiality of the information so exchanged between the two countries. Accordingly: “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 and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by this Agreement.”

Again, one need not be a student of law to decipher the contents of Article 26. It is apparent that the confidentiality of the information applies only to situations where DTAA is applicable in the first place – i.e. to a legitimate income arising in one country to an honest tax-payer in another, not otherwise.

Surely, DTAA is not intended to benefit buccaneers evading taxes in both countries and definitely not those who shy from even owning the income in the first place. But this is what the Government of India is arguing with the apex court for the past three years without any let or fear of contradiction!

The emphasis strangely seems to be on the words “any information” without referring to the previous 25 Articles in the DTAA that deal only and only with income arising to a resident in India and having income in Germany [or vice-versa] and nothing else.

Stunned? Now get Stumped!
If the reference to the Indo-German DTAA and the consequential debate on confidentiality is stunning, the reference to origin of the “information” would stump you. The origin of this information is not in Germany, but Liechtenstein.

It is often remarked that people all over the world park their dirty money in Switzerland. And the Swiss? Well it is Liechtenstein – popularly called the ugly wart in the otherwise beautiful face of Europe. In fact, the origin of this “information” is from the LGT Bank in Liechtenstein, where the Germans were successful in prising open the details of account holders by apparently bribing an employee of that Bank.

Having obtained the details in 2008, the Germans were willing to share the “information” [i.e. the data they obtained illegally from LGT Bank] with all sovereign governments. And that included India. It is pertinent to note that we dithered till 2011 when the hydraulic pressure of public opinion forced the then UPA government to seek this “information” from Germans, inexplicably under DTAA.

Now where does DTAA between India and Germany figure in this illegal data obtained from Lichtenstein by Germans? Why did the then UPA Government seek information under DTAA? Did the Germans share this information with other countries under the respective DTAA or did it provide it in normal course? And crucially where is the confidential clause in such “information” obtained illegally?

Questions for which there are no answers.

Strangely, having criticised the previous UPA Government when it was in office for seeking information under the DTAA, the NDA is now explaining the virtues of DTAA and explaining as to why the Hon’ble SC should treat information obtained from Germany – read Liechtenstein – as confidential and not reveal the names of account holders.

Wonders never cease, do they?

It may be noted that the “information” from Germany comprises details of a mere 18 account holders against whom the Income-tax department has, according to the recent Writ filed in the Hon’ble SC, concluded investigations under the Indian tax laws and launched prosecutions.

But this Liechtenstein data obtained through Germany is a trailer of a magnum opus. The next set of data were received from the French when they did lay hands on an employee of Zurich Branch of HSBC, Switzerland. This data from France contains the names of approximately 700 Indians. It is not clear at this point whether the Government of India is citing the confidentiality clause in the Indo-French DTAA also. If they do, let us be clear, it is an elaborate charade.

What is interesting is that the data obtained thus far – from Switzerland through the French authorities and Liechtenstein through the German authorities is divine providence. On both cases, the Government of India has nothing to show for its own efforts.

It may not be out of place to mention that for the past decade the Government of India [under the UPA of course] has played footsie with such account holders by not having one successful indigenous probe. And even as the French and German have done and provided data to us on a platter, the UPA Government acted with great reluctance and with a calculated aim to obfuscate.

Naturally, that brings us to the question on the need to differentiate between “Black” and “Red” Money. Money parked in secret accounts abroad in a tax haven for fear of taxes by a businessman is purely Black Money. World over tax havens cater to the need of such businessmen. It is a sin but of a lesser order.

But the real issue is Red Money. And surely that sustains tax havens which offer secrecy to generators of “Red” money, launders it and allows it to be re-cycled into global economy as lily white clean money.

It is therefore natural that the names of the red money account holders – the drug peddler or the corrupt minister – that is of interest to the nation as the entire Red money – not merely the tax portion belongs to the Government. And on this, there cannot be any secrecy, DTAA or no DTAA.

Strangely, the Government of India seems to be oblivious to this distinction. By seeing this as a “Black Money” problem and hence addressing the same purely as a tax evasion issue and leaving it to the tax authorities to deal with the same, we are guilty of diluting the issue.

More pertinently, the UPA is guilty of seeking this information from the Germans under the DTAA. And even if the Germans have provided the information under the DTAA and now object to the same being made public, the NDA government must explain the position to the Germans as it should to the Hon’ble Supreme Court.

And either way – DTAA does not apply to “Red Money.” Over to Hon’ble Supreme Court for a precise ruling on this issue.

Else the debate on the issue is fast degenerating into a farce.


Last modified on Friday, 31 October 2014 17:39