The Tax Treaties are signed between two States in order to ensure avoidance of double taxation and exchange of information for prevention of evasion or avoidance of income-tax
It is a general perception that a very substantial amount beneficially owned by Indian residents is lying stashed in Swiss Banks. However, the said amount continues to escape tax in India despite a comprehensive Tax Treaty between India and Switzerland since 1994. The treaty did not serve the purpose because the treaty had some limitations due to which relevant information from Swiss Banks could not be obtained.
The treaty provided that the contracting State will share information which is at their disposal under their respective taxation laws in the normal course of administration. The domestic laws of Switzerland do not allow sharing of information by the Banks, Financial Institution etc. with the Swiss tax authorities in the normal course. Therefore, the information could not be passed on to the Indian tax authorities.
Therefore, the Government of India signed a Protocol with the Government of Switzerland in August 2010 for the purpose of amending the Indo-Swiss tax treaty.
The said protocol was approved by Swiss Parliament on 17th June, 2011 and it finally entered into force on 10th October, 2011. Accordingly, in India, the provisions of the said protocol will become applicable from 01st April, 2012 and in Switzerland from 01st January, 2012. However, it has been specifically provided that the amended provisions, relating to exchange of information, will be applicable with respect to information pertaining to period on or after 01st January, 2011.
The salient features of the new protocol are:
- That the State shall endeavour to obtain requested information notwithstanding that such information is not otherwise required by that State.
- That the contracting State shall not decline to supply information solely because the information is held by a bank, other financial institution. It has been further provided that the tax authorities of the requested contracting State shall have the power to enforce the disclosure of said information notwithstanding any contrary provisions in its domestic laws.
- The requesting State shall be required to give certain details relating to name, period of time for which information is required etc. etc. to the requested State.
The new protocol seeks to remove all limitations due to which the Indian Government was not able to obtain the required information. Now, the tax authorities have been given specific power to obtain information from banks. This provision has an overriding effect over the domestic laws.
However, certain points need specific attention. The Protocol provides that India shall be required to give name of the person in respect of whom the information is desired. It is quite possible that money may infact be lying in the name of a different person, quite often a foreigner to India. Therefore, it is not clear as to how the Swiss Tax Authority will gather the desired information in respect of a person who has used disguised name.
The new protocol was signed on 30th August, 2010, but the same has been made applicable, as far as exchange of information is concerned, w.e.f. 01st January, 2011. In other words, the Indian Government will not be able to obtain information with respect to information which pertains to period prior to 01.01.2011.
Since a wide publicity was given to the new protocol soon after signing (i.e. August 2010), the black money holders obviously got prior intimation that they are allowed four months time, i.e. from 30.08.2010 to 31.12.2010, to close their dealings with Swiss Banks. Because if dealing with the Swiss Bank continues after 31.12.2010, the Indian Tax Authorities will get information relating to their Swiss Account though Swiss authorities.
Therefore, it is strongly felt that the Government should take steps to tackle the problem of disguised name and exchange of information prior to January 2011 as discussed above. If immediate measures are not taken, the amended treaty will be like a blunt sword without any striking force.
H.P. Agrawal (Author is a Sr. Partner in S.S. Kothari Mehta & Co.)