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From what it means to what govt can do next: 16 FAQs about Paradise Papers

Among 180 countries listed in the data leak, India ranks 19th on number of persons named in the documents

Naveen Wadhwa 

Representative Image (Photo: Shutterstock)
Representative Image (Photo: Shutterstock)

A fresh, vast leak of financial records, dubbed the Paradise Papers, has brought the spotlight on how global corporate giants and hedge funds allegedly skirted taxes and the apparently hidden wealth of prominent Indians. This cache of 13.4 million documents comes more than a year after the release of the and includes names of Indians such as Amitabh Bachchan, MoS Civil Aviation Jayant Sinha, and Vijay Mallya, among others, according to an Indian Express report. The paper has not suggested any illegality associated with the leaked names. 

Here are 16 frequently asked questions about the leak and their answers 

1. What exactly is the case?

The Paradise Papers are evidence of more than 13.4 million confidential files by the German Newspaper Süddeutsche Zeitung. This confidential information has been shared with the (International Consortium of Investigative Journalists) and with over 90 media partners.

2. What do these Paradise Papers reveal?

The papers reveal information on the offshore activities of various high-net-worth individuals (HNIs) and multi-companies. As per these papers, many offshore companies seem to be 'sham' entities engaged in the practices of tax evasion, tax avoidance, manipulation of the market, money laundering, round tripping 1, parking black money, and bribing, among other things.

3. What do these leaked papers contain?

The leaked documents reveal questionable practices of two offshore service providers, namely, Appleby, a law firm in Bermuda, and Singapore’s Asiaciti, with 19 tax havens.

The files contain information about companies and individuals who had avoided taxes using artificial entities by stashing away money in 19 tax havens. These papers include emails, bank statements, court documents and client records covering a period of 66 years — from 1950 to 2016.

4. What link does India have with these Paradise Papers?

Among the 180 countries featured in the data leak, India ranks 19th in terms of the number of persons named in the documents and second in terms of the number of clients.

Several corporates and companies that are being investigated by Indian agencies – CBI and Enforcement Directorate – are Appleby's clients.

5. What activities is engaged in?

sets up companies, trusts and other offshore entities for thousands of clients, including HNIs, international banks, accounting firms, and multinational corporations.

This 119-year-old company, although not a tax advisor, is a leading member of the global network of lawyers, bankers, and accountants who set up offshore companies and manage bank accounts for clients.

The following functions are performed by Appleby:

a) Managing real estate assets
b) Purchasing airplanes or yachts
c) Opening escrow accounts
d) Using offshore vehicles to remit money around the globe

also provides proxy directors for companies incorporated in tax havens. These directors have no real authority to decide the fate of the millions of dollars they remit on the directions of their clients — holding companies, beneficiaries or their representatives. Often, these directors are no more than puppets.

6. How do the Paradise Papers differ from the

The leak of the last year focused on the inner workings of Panamanian law firm Mossack Fonseca.

The major difference between these two leaks is that while the revealed names of world leaders, drug peddlers, and HNIs, the Paradise Papers have revealed information about offshore activities of blue-chip clients, celebrities, and multinationals and how they took advantage of offshore jurisdictions.

7. What is the purpose of creating an offshore entity?

An offshore entity is generally incorporated to reduce the income-tax burden. These offshore vehicles are used to:

a) Reduce the tax burden in the country of residence by claiming deductions for the payment made to these entities
b) Stash the money or asset abroad to shield the same from tax authorities, banks or financial institutions
c) Assign high-value Intellectual Property Rights (‘IPR’) to offshore entities, which, in turn, are licensed to other entities
d) Pay dividend from zero- or low-tax jurisdiction.

8. What are the compliances for an offshore entity in its country of incorporation?

Generally, the compliance requirements for an offshore entity are very limited or insignificant. Incorporating an offshore company requires minimal capital, usually less than what is required for an onshore registration. In certain jurisdictions, there is, in fact, no capital needed for registration.

9. Can a person resident in India hold assets outside India?

A person resident in India is free to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such currency, security or property was acquired, held or owned by such person when he or she was resident outside India or if he or she has inherited it from a person who was resident outside India.

A resident individual can also acquire property and other assets overseas under the Reserve Bank of India's (RBI's) Liberalized Remittance Scheme.

10. Under what circumstances is a person allowed to invest in foreign companies or acquire foreign assets?

An individual person resident in India may acquire immovable property outside India or invest in companies outside India by way of:

a) Gift or inheritance from prescribed persons
b) Purchase out of foreign exchange held in Resident Foreign Currency (RFC) account maintained in accordance with the FEM (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000
c) A company incorporated in India having overseas offices may acquire immovable property outside India for its business and for residential purposes of its staff in accordance with the directions issued by the RBI from time to time
d) As per Section 186 of the Companies Act, 2013, a company can't make an investment through more than two layers of investment companies. However, a company can acquire any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country

11. Why is the tax burden nil or low in respect of income earned by offshore entities?

Generally, an income is taxed both in the country of residence and in the country of source. To avoid the double taxation, India has entered into double-taxation avoidance agreements (DTAAs) with many countries.

These DTAAs provide for the tax rates in respect of certain incomes which are sourced from India, i.e., royalty, interest, fees for technical services, etc. These rates are not always the same and a few countries levy lower tax on such income than other countries. Therefore, there is always a scope for the misuse of a DTAA by foreign investors by routing the investment or transaction through lower-tax jurisdictions.

A DTAA does not stop the tax department from denying the treaty benefits if it is established that a company has been incorporated solely with a view to avoid tax. The tax department, in such a situation, is entitled to look at the entire transaction as a whole and may take into consideration the real intent of the parties.

12. When shall an income or asset be deemed to be undisclosed?

Ordinary residents filing returns of income for the financial year 2011-2012 and subsequent years are required to disclose their foreign assets and income earned outside India, even if they are not liable to file their returns. If resident individuals have not disclosed the following information in their returns of income, it shall be deemed to be a case of un-disclosure:

a) Income earned outside India
b) Foreign bank accounts
c) Foreign interest in any entity
d) Foreign immovable property 
e) Concerns in which the person has signing authority
f) Any other overseas assets
g) Foreign trust in which individual is a trustee

13. What action can the CBDT take on the basis of these leaked documents against persons involved?

If the persons named in the leaked documents have not disclosed their financial interest, income or assets in overseas entities in the return of income, CBDT can take following action against them under the Income-tax Act:

a) A notice can be issued under Section 147 or Section 143(2)
b) Search and seizure action under Section 132
c) Can call for information from them under Section 133
d) Imprisonment for a period of minimum 6 months, which can be extended up to 7 years with fine
e) Penalty of up to 200 per cent of tax evaded

14. What action has the government taken against persons involved in the  

The government constituted a Multi-Agency Group (MAG) on April 4, 2016, to facilitate a coordinated and speedy investigation. The MAG consists of officers of the Central Board of Direct Taxes (CBDT), Enforcement Directorate (ED), Financial Intelligence Unit (FIU), and RBI. So far, the MAG has submitted seven reports to the government. 

The contained brief particulars of about 426 persons, prima facie, who are Indians or persons of Indian origin. The income tax department has conducted enquiries in all 426 cases by making references to foreign jurisdictions. Based on the analysis of the information obtained and investigation conducted, the outcome so far indicates that 147 actionable cases and 279 non-actionable cases exist.

Out of the 147 actionable cases:

a) Investigations have led to the detection of undisclosed income of Rs 792 crore so far
b) Searches have been conducted in 35 cases and surveys in 11 cases
c) In 5 cases, criminal prosecution complaints have been filed
d) In 7 cases, notices have been issued under Section 10 of the Black Money (Undisclosed Foreign Income & Assets) Act

15. Probe likely into Paradise Papers?

The investigation units of the income tax department have been alerted to take note of the revelations for immediate appropriate action. The government has directed that investigations in cases of Paradise Papers will be monitored through a reconstituted Multi Agency Group, headed by the CBDT chairman. The new MAG will have representatives from the CBDT, ED, RBI, and FIU.

16. What would be the consequences if any foreign income or asset is found to be undisclosed?

The Anti-Black Money Act came into force with effect from April 1, 2016. This Act is applicable to all persons resident in India (not being 'not ordinarily resident'). This Act has been enacted to tax the foreign income and assets (including financial interest in any entity located outside India) of a resident individual which were not declared earlier to the tax authorities.

If information leaked in the Paradise Papers provides evidence that Indian residents did not declare their foreign income or foreign assets in their return of income or under the Voluntary Disclosure Scheme, they shall be taxed at a flat rate of 30 per cent.

The penalty for such suppression of income or asset shall be equal to two times of the amount of tax payable thereon. Further, there shall be rigorous imprisonment from three years to 10 years for such tax evasion.
The author is deputy general manager at

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First Published: Sun, November 12 2017. 16:50 IST