The Union Budget 2017-18 tabled in Parliament yesterday was one of many firsts. The Finance Minister, Arun Jaitley began his speech on taxation by acknowledging that the country’s tax-GDP ratio, as well as the direct-indirect tax ratio are lower than optimal. A high-tax GDP ratio and a higher emphasis on direct taxes are elements central to a healthy, progressive tax system and greater equity in society. Jaitley’s announcements on cutting personal income tax rates for the slab of Rs 2.5 – 5 lakh, changes in political party financing and capping of large cash transactions must have invited cheers in every room. The budget speech however, did not draw attention to a number of initiatives taken by the government in the past few months to curb the menace of tax avoidance.
Despite the popular rhetoric regarding the rich hoarding black cash in the country, it is actually cross-border movement of money that is illegally earned, transferred or utilised (through trade manipulation, organized crime and corruption) or tax avoidance by multinational companies that leads to developing countries, including India, lose over $1 trillion every year to illicit financial flows. Jurisdictions known as ‘tax havens’ across the world offer powerful MNCs and rich individuals banking secrecy and the ability to sidestep financial regulations that apply to people like you and me. However, this secrecy sure hurts the public, as profits and wealth go untaxed, countries lose revenue and allocations in budgets shrink. Reportedly, assets worth $7.6 trillion are stashed in tax havens across the globe.
To address the severity of this multi-faceted issue, the Ministry of Finance has amended several Double Taxation Avoidance Agreements (DTAAs) in the past year with countries including Mauritius, Singapore, Cyprus etc., and is in the process of negotiations with other nations for the same. DTAAs have been misused and exploited in the past, to avoid paying any taxes – resulting in double non-taxation – and re-routing black money through tax havens for investment in India. The General Anti-Avoidance Rules (GAAR) have also been adopted by the government, and are going to be implemented from April 1, 2017. The regulation would allow tax officials to deny tax benefits if the transaction in question is carried out for the sole purpose of tax avoidance. GAAR extends to deny double taxation avoidance benefits, as mentioned earlier, if deals in tax havens are found to be avoiding taxes. Both these initiatives did not find mention in the Union Budget documents.
The Union Budget has announced a few new laws to address financial crime – one for confiscation of property of economic offenders, and another to deal with illicit deposit schemes. Strengthening the government’s commitment towards the Base Erosion and Profit Shifting (BEPS) project led by the G20 and the OECD, the Budget announced that transfer pricing provisions in India would be aligned with OECD’s transfer pricing guidelines and international best practices; and interest payments to a related entity would be capped at 30 per cent of earnings before interest, taxes, depreciation and amortization.
Further, the government committed to the standard of Automatic Exchange of Information in June 2015, allowing exchange of financial information like names, addresses, tax identification numbers and account balance at regular intervals between countries, regarding their citizens holding bank accounts abroad. One of the early adopters of the standard, India will start exchanging information with other countries, and receive information regarding Indian citizens' assets abroad starting September 2017, on an automatic and periodic basis. This is an improvement over the previous standard, where the Indian tax authorities had to request information on a case-by-case basis.
India has also introduced a provision for creating a registry of beneficial owners of companies registered in India, in the Companies (Amendment) Bill, 2016. This registry seeks to identify the true human owners of all companies (who ultimately control and benefit from a company) registered in the country. The provision requires all companies to file a return of their ‘significant beneficial owners’ who own 25 percent of shares, with the Registrar of Companies. The Bill is pending in Parliament.
However, there are loopholes that remain in the standard of Automatic Exchange of Information as well as the clause on Beneficial Ownership that may be exploited by individuals and entities seeking to avoid taxes. The OECD-led BEPS project though a step in the right direction, does not adequately address developing countries’ differentiated concerns regarding the various ways in which they lose revenue. Particularly, the transfer pricing guidelines suggested by BEPS are complicated and expensive for developing countries to implement. The standards that the BEPS project seeks to implement in countries across the world have been shaped by 35 rich and powerful OECD member countries. This also raises the question of the design of international institutions that form the norms of international taxation, as this runs the risk of benefiting rich countries and leaving developing countries out of the process.
Government of India should seek to address these loopholes at the national level, while simultaneously support the establishment of a representative and well-resourced global tax body under the auspices of the United Nations, which would give a chance to all countries, rich and poor alike, to shape the norms of international taxation that affect them directly.