Indian financial institutions face the risk of sanctions by the US, under the Foreign Account Tax Compliance Act (Fatca) - the new anti-tax evasion law in the US, - if the Supreme Court directs the Centre to disclose information about foreign accountholders even without the launch of prosecution into these.
This will be a breach of existing treaties; India might not be able to commit to confidentiality in new tax pacts with other countries.
As India is racing against time to sign Fatca by December 31, the apex court's May 1 judgment, directing the government to share documents in eight cases in which investigation hadn't found evidence of tax evasion, has put the finance ministry in a bind.
On October 16, it filed an application, seeking clarity on whether the court's order would forbid the government from entering into any treaty with a clause on maintaining confidentiality of information received. The clarification is essential for India to commit to its current and prospective treaty partners that the information received will be used only for tax purposes and can be disclosed in public court proceedings only after prosecution for tax evasion is filed.
If the apex court clarifies it has barred the government from doing so, India won't be able to sign the Fatca, as well as other tax treaties under international standards.
"For Fatca and many international tax treaties, we need the approval of the court. If it doesn't allow maintaining the confidentiality, we can't share information under these agreements and Indian banks will face the consequences," a finance ministry official said on condition of anonymity.
Under Fatca, all foreign financial institutions have to share information on American taxpayers. If India fails to sign the Fatca, Indian financial institutions will become non-compliant, subjecting these to "a regressive" 30 per cent withholding tax and exclusion from US markets.
"The requirement to sign the Fatca is fairly stringent and non-negotiable. Most countries have signed it. Indian financial institutions operating in the US might suffer a backlash because they are required to comply with the US law," said Vidya Rajarao, partner (forensic services), Grant Thornton India LLP.
On Monday, the government told the apex court non-sharing of information would hamper India's efforts to secure details of tax evaders with illegal accounts abroad. The new global standards on automatic exchange of information, which can help tackle the issue of black money, have the same confidentiality requirements.
While India has, for years, been struggling to get information from tax havens about its residents who stashed black money abroad, as many as 50 countries, including Switzerland, Cayman Islands, Luxembourg and Mauritius, have agreed to give information about US tax evaders. The US will also reciprocate by sharing information about taxpayers of these countries.
According to officials, if India doesn't sign the Fatca, no US company will find it attractive to invest in India due to withholding tax. On April 11, the US Treasury had said it had reached an agreement "in substance" with India on the Fatca. However, it was only a draft agreement between senior officials of the two sides and will have to be approved by the Indian Cabinet.