Few governments are as considerate. Nearly 18 months after the first list of Swiss bank account holders was leaked to the media, New Delhi has spelt out a plan to prepare a white paper on black money
and ask citizens to come clean about their offshore assets. It's a long
enough time for most to cover their tracks, move money to safer
destinations and obliterate audit trails. Only the naive and hopelessly
careless would still be running accounts with the Alpine banks.
The government can't touch those who have managed to close their accounts and transfer assets before January 1 when the treaty between India and Switzerland became operational. Swiss banks' famed secrecy may be under attack, but they are unlikely to violate the code of silence and share details on old accounts that have ceased to exist. It is not known whether New Delhi has approached Swiss authorities for any information after January 1.
Till now tax officials here have been knocking on the doors of people they suspect on the strength of a stolen list of accountholders who had parked money with the Geneva arm of a British bank. A few cases where they have initiated (or are about to begin) prosecution relate to accountholders who lost their nerves at the sight of taxmen and were too rattled to understand that such a list will not hold water in a court of law. But those who were clever enough to buy time and make quick calls to their chartered accountants were unruffled. Most of them took professional advice to 'regularise' the accounts with innovative structures (that have now become common) to hold money and assets.
A typical transaction to move money from Switzerland involves buying a shell company in Dubai or Singapore, opening an account of the company through the Reserve Bank-approved liberalised remittance scheme that allows investments up to $200,000 a year per person. This allows the Indian resident to hold shares of a paper company having account with a bank in Dubai or Singapore. A year ago, RBI, which perhaps had a whiff of what was on, barred residents from using the scheme to float new companies. But it has hardly been a deterrent as there is an army of lawyers ready with paper companies that are up for sale.
Next, the money lying in the numbered account in Switzerland or any tax haven is wire-transferred in tranches to this account as income earned from consultancy or trade advisory services. As long as the company holding the money in the bank account does not pay a dividend, the Indian shareholder is not required to pay tax. At a later stage, the money can always flow back into India in some FDI-compliant project or in listed stocks. Interestingly, some of the Swiss banks that have honed their skills in money laundering for decades have set up large bases in Asia. So the money can simply flow in a few seconds from their old HQ in Switzerland to Singapore office.
The government can't touch those who have managed to close their accounts and transfer assets before January 1 when the treaty between India and Switzerland became operational. Swiss banks' famed secrecy may be under attack, but they are unlikely to violate the code of silence and share details on old accounts that have ceased to exist. It is not known whether New Delhi has approached Swiss authorities for any information after January 1.
Till now tax officials here have been knocking on the doors of people they suspect on the strength of a stolen list of accountholders who had parked money with the Geneva arm of a British bank. A few cases where they have initiated (or are about to begin) prosecution relate to accountholders who lost their nerves at the sight of taxmen and were too rattled to understand that such a list will not hold water in a court of law. But those who were clever enough to buy time and make quick calls to their chartered accountants were unruffled. Most of them took professional advice to 'regularise' the accounts with innovative structures (that have now become common) to hold money and assets.
A typical transaction to move money from Switzerland involves buying a shell company in Dubai or Singapore, opening an account of the company through the Reserve Bank-approved liberalised remittance scheme that allows investments up to $200,000 a year per person. This allows the Indian resident to hold shares of a paper company having account with a bank in Dubai or Singapore. A year ago, RBI, which perhaps had a whiff of what was on, barred residents from using the scheme to float new companies. But it has hardly been a deterrent as there is an army of lawyers ready with paper companies that are up for sale.
Next, the money lying in the numbered account in Switzerland or any tax haven is wire-transferred in tranches to this account as income earned from consultancy or trade advisory services. As long as the company holding the money in the bank account does not pay a dividend, the Indian shareholder is not required to pay tax. At a later stage, the money can always flow back into India in some FDI-compliant project or in listed stocks. Interestingly, some of the Swiss banks that have honed their skills in money laundering for decades have set up large bases in Asia. So the money can simply flow in a few seconds from their old HQ in Switzerland to Singapore office.
It's just a little more
complicated if the money is held in the bank account of an offshore
trust. In such an arrangement the family members and relatives of the
person with undisclosed funds are beneficiaries of the trust. The modus
operandi followed here is more convoluted: it begins with posting one of
the trust beneficiaries abroad, where the person spends a few months to
attain NRI status and slip out of the clutch of Indian tax officials
before receiving benefits from the trust.
But those who choose to shelter their black money at home will have to be far more careful once the new rules are in place. Many of them took refuge in an old court ruling that said the taxman cannot question the source of funds of investors (or the source of the source). They bought shares at exorbitant prices in companies which have to issue fewer shares because of the high premium. Now, in order to avoid tax, the company receiving the money has to explain the source of funds of its investors - a regulation that nullifies the old court ruling.
Also, companies will have to keep a record of all entries in their book of accounts. Today, a firm with a 10-crore loss and unexplained expenses of 3 crore, is not asked to pay tax because the entity records a loss of 7 crore even after factoring in the expense. But under the new rules, tax authorities can demand tax at the highest rate on the Rs 3-crore expense that cannot be justified.
One hears that the tax department has discovered records where people with little income have high expenses. According to the rules proposed in the Budget, even if such a person shows an income level that's within the exempted category, the unusually high expenses can be taxed at a higher level. In other words, all with income below 10 lakh and not paying tax at the rate of 30% will have to pay tax at 30% on the undisclosed income (or unaccounted expenses).
The tax net has been cast wider. And new regulations will make it more difficult to hide income. But many who saw it coming have escaped the net. And, tax havens will retain some of their charm as there will be fewer rooms left at home to park black money
But those who choose to shelter their black money at home will have to be far more careful once the new rules are in place. Many of them took refuge in an old court ruling that said the taxman cannot question the source of funds of investors (or the source of the source). They bought shares at exorbitant prices in companies which have to issue fewer shares because of the high premium. Now, in order to avoid tax, the company receiving the money has to explain the source of funds of its investors - a regulation that nullifies the old court ruling.
Also, companies will have to keep a record of all entries in their book of accounts. Today, a firm with a 10-crore loss and unexplained expenses of 3 crore, is not asked to pay tax because the entity records a loss of 7 crore even after factoring in the expense. But under the new rules, tax authorities can demand tax at the highest rate on the Rs 3-crore expense that cannot be justified.
One hears that the tax department has discovered records where people with little income have high expenses. According to the rules proposed in the Budget, even if such a person shows an income level that's within the exempted category, the unusually high expenses can be taxed at a higher level. In other words, all with income below 10 lakh and not paying tax at the rate of 30% will have to pay tax at 30% on the undisclosed income (or unaccounted expenses).
The tax net has been cast wider. And new regulations will make it more difficult to hide income. But many who saw it coming have escaped the net. And, tax havens will retain some of their charm as there will be fewer rooms left at home to park black money
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