Business Standard

Information sharing with foreign countries may help tackle black money

H P Agrawal 

The problem of black money in India has reached to a point that the entire political spectrum is committed to bring back the black money illegally stashed outside India. The Government of India is taking serious steps in this direction, including amendments in the tax treaties between India and other countries where the black money is expected to have been kept.

The amendment to tax-treaties generally relates to exchange of information between India and tax-haven countries. In this process the government expects to collect information about the money as well as black money holders. The example of such amendment is a protocol signed with Switzerland in August, 2010. The said protocol was approved by Swiss Parliament on June 17, 2011 and it finally entered into force on October 10, 2011. Accordingly, in India, the provisions of the said protocol became applicable from April 1, 2012 and in Switzerland from January 1, 2012.

The basic legal framework for exchange of information under various tax treaties is provided in 'Article 26' relating to "Exchange of Information". This Article authorises the competent authorities of the contracting states to exchange information, which is foreseeably relevant for implementing the provisions of the tax treaties.

It, however, needs to be mentioned that although the government has made serious amendments in the legal provisions to achieve the objective of unearthing black money, no instructions were available to guide the tax authorities to collect relevant information from foreign authorities.

In the above context, it is heartening to note that Central Board of Direct Taxes (CBDT) has recently issued an important circular (No 1, dated January 17, 2013) to fill up the aforesaid gap. The said circular has been issued for "Exchange of information for tax purposes with foreign jurisdictions - Guidelines for inbound and outbound requests-regarding". Vide the said circular, the CBDT has notified "Manual on Exchange of Information". The guidelines and the manual will enable the Indian tax authorities to request for the desired information in conformity with the relevant provisions of the respective tax treaties.

In the said circular, due care has been taken to instruct that action should promptly be taken in all material cases. Where however, the information received is likely to result in an undisclosed income below Rs 50,000, the officer concerned may not conduct enquiries/ verification, after obtaining approval from CIT/DIT.

The circular also enumerates some relevant case studies. The said case studies are really an eye opening exercise which, besides illustrating the areas for exchange of information, also mentions the success achieved by the Government of India in unearthing unaccounted transactions and black money.

A brief description of the case study:

Bogus foreign enterprises: The information relating to this has already resulted in assessment of undisclosed income of more than Rs 15 billion.

Bogus gifts from foreign countries: The information received has helped in disallowing the fictitious tax claims.

Investment from a non-existent entity from a foreign jurisdiction: The information received revealed that the foreign company stated by the Indian taxpayer to have made the investments does not exist in the other country.

Unaccounted credit card expenses: The information received from the country where the credit cards were used revealed that Indian assessee has spent millions of rupees abroad using credit cards and the payments to credit cards were made regularly from undeclared bank account.

Fictitious loans and gifts: Loan and gifts of Rs 40 million was shown by the Indian resident to have been received from his relative abroad. Information received revealed that the foreign party had no capacity to give the said sum because the total income returned by the foreign party was only in few thousand pounds.

Foreign bank account not reported: The information received has already resulted in assessment of undisclosed income of more than Rs 210 million.

Commission earned abroad not offered to tax: On receipt of information, it was found that the Indian company has not disclosed Rs 6 million on this account. Request from a foreign jurisdiction resulted in detection of tax evasion in India.

It is clear from the above illustrations that now any Indian person entering into any fictitious agreement in foreign countries is likely to be caught with serious implications. The tax authorities have now been armed with sharp legal weapons to go into the depth of any suspected transaction. The aforesaid circular and other provisions introduced by the Government will surely help in curbing the problem relating to bringing back the black money stashed outside India besides curbing generation of black money in future.

This article has been co-authored by

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First Published: Sun, April 21 2013. 21:29 IST