India must be mindful of its reputation for tax terror in hunt for Swiss stash
Oct 10, 2023
Summary
Instead of using information shared by Swiss authorities to go after the holders of legitimate accounts, the government should use it to establish audit trails and and track down tax evaders
Switzerland is not exactly the first place where Indians turn to hide their unaccounted wealth. The lure of Swiss banks has diminished ever since the country’s banking secrecy stopped being as murky as they used to be over a decade ago. Following a new pact for what is called the “automatic exchange of information", India has been receiving financial information of accounts held by Indian residents in Switzerland since 2018.
Mint has reported about the fifth round of this exchange of information, with Switzerland sharing the details of nearly 36 lakh financial accounts with 104 countries.
Funds parked by Indian citizens and companies in Swiss banks, including through India-based branches and other financial institutions, are reported to have declined by 11% in 2022 to 3.42 billion Swiss francs (nearly ₹30,000 crore) from 3.83 billion Swiss francs in 2021, according to data from Switzerland’s central bank in June. This was largely due to a steep drop in customer deposits.
While consistent sharing of information in compliance with the pact is welcome, it's important to remember that past transgressors though cannot be brought to book under the revised tax treaty signed by the two countries.
How will Indian tax authorities use this mine of information to hunt down income that evades tax? That is the real challenge. The maturity of the Indian tax authorities is going to be tested at a time when India's reputation has taken a beating for rising tax terrorism.
Indian officials are reported to have said that the new details shared with them pertain to "hundreds of financial accounts", including many cases in which multiple accounts are associated with individuals, corporations and trusts. They added that the data will be used extensively in probes of suspected tax evasion and other wrongdoing, including money-laundering and terror funding. The amount involved in the exchanged information and other specifics are not in the public domain.
Any presumption that all Swiss accounts are illegitimate is not correct. Individuals and corporations could well hold deposits for investments or pending payments. Deposits could also be held by those who do not have to pay tax on their foreign income earned in the years that they have been non-resident Indians. Coercing holders of legitimate accounts with tax-compliant deposits is not fair, and many cases smack of tax terrorism. This must stop.
Instead, the government should establish audit trails for financial transactions, using technology to track down tax evaders. The Organisation for Economic Cooperation and Development (OECD), which scripted standards for exchange of information, also underscored the need to equip tax administrations with technology tools to verify compliance. This had the backing of the G20, which vowed to end tax evasion.
India has the IT prowess to do this, and it must be deployed properly, now that the country has a mine of information. The maturity of the tax administration will be defined by how it uses the data and invokes the law.
Last year, for instance, the Federal Supreme Court of Switzerland echoed the exchange of information pact, providing some comfort to Indian tax authorities. It said Switzerland would share information with Indian tax authorities about the beneficiaries of trusts set up there without judging the data’s end use. The orders applied to foreign trusts with many beneficiaries, some of whom are connected to big Indian corporate houses located in tax havens. Here, again, any presumption that all off-shore trusts have illicit money is not right. Tax authorities have to establish the source of income to prove tax evasion.
For its part, Switzerland has been actively sharing details about accounts of Indians suspected to have indulged in financial wrongdoings after the submission of prima facie evidence. So, it is imperative for tax authorities here to complete investigations and close cases swiftly.
For tax administrations, the absence of information on beneficial owners poses a real challenge. Globally, a listing of the actual beneficial owner of any trust or company is a long-pending reform. When this happens, there will be transparency even when an extensive network of companies in different jurisdictions is used to hide the actual owner.
A reiteration that – like in the UK – every country must adopt a unique identifier for people and other legal entities, including companies, charities and trusts, is in order. Fishing expeditions without any prima facie evidence of tax evasion are wholly avoidable.
[Mint]
