India clamps down on tax havens amid Paradise Papers exposure

More than 700 Indian personalities were exposed by the leak, as the country's government looks to stop cash leaving

epa06243512 (FILE) Bollywood actor Amitabh Bachchan attends a photocall in New Delhi, India, 21 August 2013 (reissued 04 October  2017). Amitabh Bachchan will celebrate his 75th birthday on 11 October 2017.  EPA/MONEY SHARMA

India is striving to prevent vital tax revenues leaving the country, with the recent Paradise Papers leak highlighting the widespread use of overseas havens

Over 700 politicians, corporates and Bollywood stars, from India, were among those named as using such tax havens this month - locations where there are zero or low rates of taxation.

The 714 figures were revealed in one of the biggest data leaks in global history, when a cache of 13 million secret documents from Appleby, a Bermuda-based law firm that helps businesses and wealthy individuals find tax shelters, were released earlier this month.

“The government is taking steps to crack down on things,” says Priyesh Sampat, the founder of Simplifying Legacies, Empowering Successors, a Mumbai-based estate planning advisory firm. “It is widespread and whenever the money flows out of the country, automatically the economy is affected.”

The pressure has now mounted on authorities to combat outflows of money, particularly as the Paradise Papers leak is set against a backdrop of slowing economic growth in the country. The government has reacted by launching a probe into the findings, to be conducted by agencies including the country's markets regulator, the Securities and Exchange Board of India and its income tax department.

Bollywood actor Amitabh Bachchan, the minister of state for civil aviation, Jayant Sinha, and the disgraced tycoon Vijay Mally, associated with the failed Kingfisher airline, were among the Indian names that appeared in the Paradise Papers leak, reported to have used overseas havens.

The Indian Express newspaper revealed the names, one of the dozens of publications globally that the International Consortium of Investigative Journalists shared information, obtained by the German newspaper Süddeutsche Zeitung, with.

Indian finance minister Arun Jaitley told the Indian paper that the revelation was “a great development”. “The secrecy of tax havens and transactions done through them have been smashed,” he commented.

Mr Sinha, meanwhile, took to Twitter to defend the transactions he has been connected to, saying they were “bona fide and legal”.

Actor Mr Bachchan also figured in the Panama Papers last year, another major leak related to offshore tax havens.

Bermuda, the Cayman Islands, and Mauritius, are among the destination of choice for Indians to park their money to reduce taxation and even to hide gains acquired fraudulently.


Read more:

Paradise Papers: Apple and Lewis Hamilton accused in latest release of data

Paradise Papers: Prince Charles profited from stake in friend’s offshore firm


Narendra Modi's government has made a point of trying to stamp out black money and has promised to bring back billions of dollars that have been sent abroad. This is part of a broader push, that saw the government banning the two highest value banknotes in the country just over a year ago in its demonetisation move. More recently, it has been aggressively closing in on shell companies - firms without active business operations or significant assets, that can sometimes be used illegitimately.

Boosting tax revenues collected is critical for the government, with the economy slowing to a three-year low of 5.7 per cent GDP growth in the quarter between April and June. India desperately needs funds to invest in areas such as infrastructure, education and health to help the country continue to develop economically at the pace needed to create enough jobs for its population which totals 1.3 billion people.

More than US$510 billion of black money was sent out of India in the decade between 2004 and 2014, according to estimates by Washington-based think tank Global Financial Integrity.

Analysts note that tax havens are not only used by Indians as a means of tax avoidance, they can also be used as a means of parking money that has been acquired through corruption and other illegal activities, often for the purposes of money laundering.

Lawyer say it is not necessarily the case that all outflows of cash from India from companies and individuals into tax havens are illegal flows.

“When it comes to tax, there are essentially two buckets that you're talking about,” says Abhay Sharma, a partner at Shardul Amarchand Mangaldas, an Indian law firm. “One is of course tax evasion and the other is what constitutes legitimate tax structuring.”

He explains that the Indian government is eager to reduce a lot of these flows out of the country – whether they may have been legal or not.

“We are moving to a place or a situation where even if one does plan his tax affairs in a way to minimise one's tax outgoing, we want to clamp down on that as well and if going forwards, that is likely to be the new normal, I think companies and individuals will have to accept that and deal with it accordingly.”

This is a factor of “looking at the country's tax base not being eroded”, adds Mr Sharma.

For example, the Indian government last year closed a tax loophole with the island of Mauritius that had been widely used by Indians. Previously, investors were able to take advantage of a tax treaty that enabled investors to route money through Mauritius to avoid paying capital gains tax on short-term investments. The system was widely exploited, resulting in “round tripping”, which entailed Indian companies sending money to Mauritius and then reinvesting the funds into India from the island nation to avoid taxes.

In addition, the Indian government has been working to uncover money parked in Swiss bank accounts by, for example, tying up with authorities in Switzerland to share more financial information.

Other steps that New Delhi has taken include clamping down on ensuring foreign assets are disclosed and the implementation of the general anti-avoidance rules, known as GAAR, which enable authorities to more effectively target illegal tax avoidance arrangements.

India has been very active in the Organisation for Economic Cooperation and Development's Base Erosion and Profit Shifting (BEPS)  programme that aims to close in on strategies used by multinational companies to avoid taxes, which ultimately reduces the tax base for countries.

But some argue more needs to be done. R Vaidyanathan. in his recently released book, Black Money and Tax Havens, writes: "Leaders of the one of the most affected countries, namely India are not doing or saying much about them", referring to the use of tax havens.

“The government is trying its best to settle all issues by collecting some tax since prosecution can be painful and expensive.”

In the case of the Panama Papers, in August finance minister Mr Jaitley, said that criminal proceedings would be conducted in instances of wrongdoing.

Then, following the Paradise Paper leak, Mr Jaitley told reporters it would found out "who are those people with totally illegal accounts and who have plausible defence”.

Mr Sampat sayst that investigating the Paradise Papers will be a complex and labourious task. A complex chain of layers and structures is often implemented in some cases when money is sent to offshore tax havens, creating a labyrinth difficult for even the highest of authorities in India to navigate.

“If they find that these transactions have been done illegally, then actions will be taken,” he says.

But even with India's best efforts, much of the money sent abroad is likely to have vanished without a trace.