INSIDE THE PANAMA PAPERS: A CURIOUS CASE OF TAX EVASION
Author: Paul Abraham,
School of Law Christ (Deemed to be University)
“The key to revenue growth is tax reform that closes loopholes and that is pro-growth. Then with a growing economy, that’s where your revenue growth comes in, not from higher taxes.”
The Panama paper revelations have put a spotlight on tax evasion and black money. Black money is not just a big menace for the Indian economy but is also a universal problem. It poses a tremendous loss of revenue in a country, finding its way through various routes and countries. The biggest force driving black money is the financing of elections. Unless the electoral cost of each candidate is publically funded, the problem of generating cash will continue.
PANAMA PAPER LEAK
A well-known law firm and a corporate service provider “Mossack Fonseca” dating back its origin to 1970’s was formed as an aid to open shell companies out of which a few corporations were used for illegal purposes including fraud and tax evasion. It is a law firm based in Panama which sells its shell companies around the world and certain papers regarding such shell companies were leaked to the International Consortium of Investigative Journalists which exposed the hidden financial dealings and the offshore holdings of some of the world’s most famous personalities. The ICIJ (International Consortium of Investigative Journalists) is commonly described as a ‘gatekeeper’ to the secrets of its clients, including drug dealers, corrupt politicians and tax evaders
The Panama Papers is considered largest international cooperation of its kind in the world. Around 400 journalists ranging from nearly 100 media organisations in over 80 countries have taken part in researching the documents. Journalists from media organisations like BBC, Guardian, Süddeutsche Zeitung (SZ) and The Indian Express among others have also worked on the project. The Papers have revealed names of thousands of people from across the world who have evaded tax and laundered money by taking help from Mossack Fonseca.
An anonymous source had contacted the German newspaper ‘Süddeutsche Zeitung’ (SZ), submitted internal documents(encrypted) from the database of Mossack Fonseca. Reports by the investigating agencies show that the leaked documents contained personal financial information about wealthy individuals and public officials which had previously been kept private. They contain more than 214,488 offshore entities, enlisting around 500 Indians in its leaks and their black investment into these tax havens so that they become safe from the prying eyes of the tax authorities to be enjoyed at leisure later. The data leak mainly comprised of emails, pdf files, photo files, and excerpts of an internal database.
11 Million documents that were held by Mossack Fonseca were released to the ICIJ (International Consortium of Investigative Journalists), the source of this still being unknown. China has blocked one of the most popular microblogging website named ‘Weibo’, which contained details about the Panama Leaks. Protests were taking place outside the Parliament in Iceland against their Prime Minister Sigmundur Davíð Gunnlaugsson for being involved in money laundering. Vladimir Putin has got nearly 2 billion trail which follows him in the Panama Paper with British Prime Minister David Camaroon following next in the series.
ESTIMATES OF INDIAN BLACK MONEY
In India, the extent of income from Black money has become quite alarming. Quite a number of attempts have been made in recent t
imes to make estimates of this Black income. Swiss Banking Association report, 2006 has released details of bank deposits in the territory of Switzerland by nationals of following countries :
- INDIA $1,456 BILLION
- RUSSIA $470 BILLION
- U.K. $390 BILLION
- UKRAINE $100 BILLION
- CHINA $96 BILLION
Tax evasion has always been an issue for the Ministry Of Finance and Income Tax department. When people evade tax, it creates a deficit in the Government’s Income and the onus to fill up the vacuum is shifted to people fighting with tooth and nail to manage two square meals a day. Corporations owned by multimillion personalities consume a huge chunk of already exiting limited resources which could have been used otherwise. Economically, opportunity cost of availing services and consuming products provided by these corporations is high indeed, usually by shell corporations (A shell corporation is a corporation without active business operations or significant assets. At the same time it is to be noted that shell companies are not illegal or illegitimate, often serving an important role for potential start-ups.)
The Modus Operandi of any tax evader would be to open up shell companies in Panama or Dubai transferring funds from his registered Indian office to the former. In turn, the money can be invested from shell companies to Indian company under the head of “foreign Investment” and profits earned out of those investments won’t be taxed owing to double taxation treatise between India and the foreign nation. Panama papers leak is indeed a revelation of a much-known public secret. Panama leak sent shockwaves to Pakistan as it featured 200 Pakistanis, most of them belonging to elite political class and the army. Some Pakistanis infuriated by this incident put Nawaz Shariff on sale at ebay.uk. It was an impulsive reaction from a country which has been suffering from poverty because of lack of funds in royal treasury. Such leaks will affect countries which are politically fragile and face routine institutional challenges. Super powers will largely be affected and polity will exhaust all means of claiming responsibilities. Brexit debate will be given a new angle as well. Both economic and structural aftermath is largely uneven.
MEASURES TO CONTROL SPAWNING OF BLACK MONEY IN INDIA
The Government has undertaken various administrative and legal measures to check and control the menace of parallel economy or black economy in the country. Committees such as Taxation Enquiry Commission (1953), Kaldor’s recommendation for Indian Tax Reform (1956), Direct Taxes Administrative Enquiry Committee (1958) and Direct Tax Enquiry Committee (1991) were the ones set up for keeping a check on Black money. These Commissions clearly point out towards the loopholes and further towards bringing about new reforms in the tax laws and tax system in the country.
In May of 2012, the Government of India published a white paper on black money which disclosed her Intention of tackling the black money problem and to form guidelines to prevent its circulation and creation in the future. The Supreme Court in order to deal with the issue of black money stashed abroad has set up a SIT (Special Investigation Team), thereby, asking the Reserve Bank to set up an institution to prevent illicit financial flow and share data with other law enforcement agencies.
The law enforcement agencies predominantly set up for this were :
Central Board of Direct Taxes: Enacted under the Central Board of Revenue Act of 1963, the Central Board of Direct Taxes is a statutory authority functioning across India. The Member of the CBDT exercises control over the Investigation Division of the Central Board of Direct Taxes. The Member controls the:
- Chief Commissioner of Income Tax Central.
- Directorate General of Income Tax Investigation
- Directorate of Income Tax Intelligence and Criminal Investigation.
- The Director General of Income Tax (International Taxation) is in charge of taxation issues arising from cross-border transactions and transfer pricing.
Enforcement Directorate: As established in 1956, the Enforcement Directorate administers the provisions of the Foreign Exchange Management Act of 1999 (FEMA). The Enforcement Directorate is given various powers such as that of confiscation of proceeds, conduction of investigation etc.
Financial Intelligence Unit: The function of this governmental organization is concerned with receiving, processing, analysing and disseminating information with respect
to financial transactions. Every month, it routinely examines about 700,000 investigative reports and over 1,000 suspect financial transaction trails to help identify and stop black money and money laundering.
Central Board of Excise and Customs and Directorate of Revenue Intelligence: Being an apex intelligence organisation, it is responsible for detecting cases of evasion of central excise and service tax. It works by issuing Modus Operandi through various circulars in making people aware about the latest trends in tax evasion.
Central Economic Intelligence Bureau: This prevents financial crimes, generation and parking of black money and illegal transfers. This organisation maintains constant interaction with its Customs Overseas Investigation Network (COIN) offices and shares intelligence and information on suspected international financial transactions. The COIN offices gather evidence from the foreign custom offices and other foreign establishments thus, helping in identifying and stopping tax evasion and money laundering.
SIT (Special Investigation Team) on black money
The former Minister of Law, Ram Jethmalani along with other citizens had filed a Writ Petition (Civil) No. 176 of 2009 in the Supreme Court of India seeking the help of the Court restore the black money accumulated in tax havens abroad and to strengthen the efforts of the government prevent further creation of black money.
In January 2011, the Supreme Court enquired as to why the names of those who have concealed money in the Liechtenstein Bank was not disclosed to the public. The Court opined that the government be more transparent in revealing all available information on the money that is being stored illegally in foreign banks.
The Supreme Court on 4th July 2011, ordered the appointment of a Special Investigating Team (SIT) headed by former Supreme Court judge BP Jeevan Reddy to act as a watch dog and monitor investigations dealing with the black money. This body would report to the Court directly and no other agency will be involved in this. The failure of the Government to reveal such information was held by the two-judge bench to be an indicator of the softness of the Government.
The government subsequently challenged this order through an Interlocutory appeal (No. 8 of 2011). The bench consisting of Justice Altamas Kabir on 23 September 2011 pronounced a split verdict on whether government plea is maintainable. Justice Kabir opined that the plea of the Government is maintainable whereas Justice Nijjar dissented to the same. In April 2014, the Government of India had revealed to the Supreme Court of the country the names of 26 people having bank accounts in Liechtenstein, as conveyed to them by German authorities. However, On 27 October 2014, the Government submitted the names of only three people having black money in foreign countries, in its affidavit to the Supreme Court who have black money accounts in foreign countries.
But on the very next day, the Supreme Court of India orders the Central Government to reveal all the names of black money account holders which they had received from various countries like Germany. The hon’ble bench of the Supreme Court also asked the Centre not to indulge in any kind of probe but rather just pass the names to them and that the Supreme court will pass the order for further probe.
The clarification affidavit filed by the Finance Ministry asserted that a complete list of cases where information had been obtained from the German and French governments along with the status of action of the Government. It further added that the CBDT officials also met and briefed the SIT (Special Investigation Team) on the status of the cases, background of the information received and the constraints faced by the government such as the non-sharing of information by the Swiss Authorities.
The Economic Times, Politics and Nation. SIT asks RBI to share black money data with government agencies //economictimes.indiatimes.com/articleshow/54015509.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst Accessed on 7th March, 2018
Income Tax Department http://www.incometaxindia.gov.in/Pages/default.aspx
International Consortium of Investigative Journalists. Panama Papers Source Offers Documents To Governments, Hints At More To Come. https://www.icij.org/investigations/panama-papers/20160506-john-doe-statement/#_ga=1.164154486.836406132.1459807380 Accessed on 7th March, 2018
Michael S. Schmidt and Steven Lee Myers. Panama Law Firm’s Leaked Files Detail Offshore Accounts Tied to World Leaders. https://www.nytimes.com/2016/04/04/us/politics/leaked-documents-offshore-accounts-putin.html Accessed on 7th March, 2018
Lawrence J. Trautman, Following the Money: Lessons from the Panama Papers: Part 1: Tip of the Iceberg, 121 Penn St. L. Rev. 807 (2017)