Prompt response

Govt must speed up tax administration reforms

The government's response to the revelation of rich and influential Indians parking their money in offshore havens has been understandably swift. On Monday, The Indian Express reported that, based on its reading of an estimated 11.5 million leaked tax documents, more than 500 Indians paid Mossack Fonseca, a law firm headquartered in Panama, to set up offshore entities in tax havens. Panama, a well-established Caribbean tax haven, also helps the global rich to create offshore companies in an easy and tax-free environment with a veil of secrecy that is not easy to pierce. On the direction of the prime minister on Monday itself, the government has set up a multi-agency investigation team to probe if any illegalities have been committed in such remittances.

The data made public so far are by no means comprehensive. It is likely that the next rounds of revelations, as and when they are made, would show many more Indians having used such facilities to open offshore companies in tax havens. While it is no comfort that these facilities were used also by several important people in many other countries, it must also be recognised at the outset that not all such investments may be illegal. But that such large numbers of rich and powerful people across the globe, including some Indians, have used this facility is a cause for concern. The government must, therefore, be commended for its decision on setting up a multi-agency probe into such investments. To be sure, the quick response is also an outcome of the government's realisation that after having made eradication of black money one of its major promises in the last general elections, it cannot afford to allow such revelations to snowball into any political controversy over a perceived lack of government action against unaccounted wealth of Indians.

In a bid to tackle the menace of black money and tax evasion, the Budget for 2016-17 had announced a scheme that would allow Indian residents to declare their past undisclosed income on payment of close to 50 per cent tax within a compliance window of four months. The government's fight against black money cannot be restricted to only providing compliance windows to tax evaders, but must also extend to strict enforcement of tax laws to prevent misuse of the existing system. It is, however, important that while ensuring compliance of the tax rules, the government must also put in place a transparent and rule-based tax administration system. In the first phase of India's reforms, tax rates were reduced largely bringing them in line with global standards, even though considerable work is still left in the areas of phasing out exemptions and ensuring stability in tax rates. That was important for encouraging people to pay their taxes and not looking for investments in tax havens. Equally important is a simple taxation regime enforced by a revenue department that has a non-adversarial approach to tax-payers. While some steps have been taken to simplify and rationalise tax administration, there is now need to speed up that process. With global standards on disclosure of foreign accounts now in force in most countries, it should not be difficult for the tax administration to follow a transparent regime to enforce laws and prevent violations of the type that some investors in offshore entities in tax havens may have committed