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Mainstream, VOL LIII No 1, December 27, 2014 - Annual Number

The Confidentiality Clause And Fighting Black Money At Home

Saturday 27 December 2014

by Pranjit Agarwala

The confidentiality clause in the Double Taxation Avoidance Treaty (DTAA) does prevent the Government of India from making public the identity of account holders without prima-facie evidence of wrong-doing. It, however, does not put restrictions on providing the relevant information to a court during legal proceedings or to an administrative body concerned with the matter. Nor does it restrain the Government of India from cracking down on black money within the country.

The Indo-Swiss DTAA does require the information provided to be kept secret. But it also provides that any such information shall be disclosed to persons or authorities including courts and administrative bodies concerned with the assessment, collection, enforcement, prose-cution or determination of appeals or issues in relation to taxes or matters for which this information is relevant. Besides Switzerland, as of now India has DTAAs with eightyfour countries which require India to follow inter-national standards for the information exchanged. However, Article 26 of the DTAA states that in no case shall there be an imposition in administrative measures that need to be carried out in accordance with the law of either country in the contracted agreement. And that the law of one state cannot restrict supply of information to the other in cases where the information is of national interest.

The Supreme Court of India is the highest judicial authority of a sovereign nation and constitutionally the custodian of the law of the land. The law of the land is supreme and cannot be made subordinate to any external state, authority, treaty or law. The Supreme Court is hearing a public interest litigation on black money in national interest. It has also constituted a Special Investigation Team (SIT) to investigate specific cases of suspected foreign bank accounts with black money. Viewed thus, any relevant information supplied to the court cannot be considered as a breach of the confidentiality clause as long as it is not made public. The Supreme Court had directed the government to hand over the information to the SIT in a “sealed cover”.

Pertinently, the courts of the United States have always upheld their judicial supremacy. The US Government has often pressurised international banks and tax havens to reveal the names of US tax evaders and nationals with unaccounted money. In such cases the confiden-tiality/privacy clause etc has not been a consi-deration. Instead non-cooperation has invited hefty fines. The French bank, BNP Paribas, was fined a heavy $ 9 billion. Apparently the US has the clout to ensure compliance.

While it is necessary to retrieve black money from abroad, it is more important to crack down on the sources of black money at home. Unless black money is generated in India it cannot be transferred abroad. A recent study by the National Institute of Public Finance and Policy (NIPFP), a Finance Ministry advisory body, has made startling revelations. It revealed that the black money generated in the Indian economy could be as much as 71 per cent of the Gross Domestic Product (GDP). India’s GDP is about $ 2 trillion. This means the country’s parallel economy is around $ 1.4 trillion! The estimated value of the parallel economy before liberalisation was 30 per cent of the GDP. Evidently liberalisation has generated more black money than inclusive economic growth.

However merely having a foreign bank account is not illegal because many Indians who go abroad to study, work or on business etc. have to open bank accounts abroad. The Reserve Bank of India permits transferring up to $ 1,25,000 annually to such accounts. Moreover, no longer is black money kept in Swiss banks or off-shore tax havens. The HSBC bank accounts in Geneva had small balances. Instead nowadays the money is laundered through a complex network of holding companies and off-shore accounts and re-invested legitimately here. Real estate and the stock markets which have witnessed an inflow of billions of dollars of foreign direct investments are the major beneficiaries of these “foreign funds”.

Significantly, many countries realising the growing threat of black money to the world’s economy and security have decided to jointly fight the menace under the aegis of the Paris- based Organisation of Economic Cooperation and Development (OECD). OECD is introducing a new protocol, Automatic Exchange of Information (AEIO), by 2017 which will enable countries to automatically receive financial information on accounts abroad without specific requests. Hence rather than focusing only on Swiss bank accounts, the BJP-led NDA Govern-ment must crack down on black money at home. Like the UPA Government it must not try to digress and take refuge behind the confiden-tiality clause.

The author, an entrepreneur and freelance writer based in Guwahati, can be contacted at pranjitagarwala@rediffmail.com