Over the last few years, there has been growing international cooperation to combat tax evasion, reflected in agreements on automatic exchange of information. Now, India and the US have signed an agreement under the Foreign Account Tax Compliance Act (Fatca), a US law. Fatca makes it mandatory for financial institutions such as banks, mutual funds, brokerages and pension funds globally to disclose information on American taxpayers to the US authorities. Failure to comply comes at a cost: a 30 per cent withholding tax on financial institutions. In turn, the US Internal Revenue Service is also expected to provide information to the authorities here about Indian account holders in the US. These bilateral and other international efforts to curb tax evasion and money laundering are certainly welcome, especially given the recent government efforts to force tax evaders to come clean by offering a compliance window until September 30 under the black money act, 2015.
Yet there are concerns. Some have been quietly voiced by Sebi, on the issue of reciprocity. Little is known about the obligations of the US to provide information to India, and whether failure to comply with the standards being imposed on Indian entities could lead to similar penalties on US financial institutions. There are also worries about the compliance burden and costs that this agreement will impose on Indian financial institutions, some of which may be servicing only a few US clients but will now be forced to carry out changes in their front- and back-end processes. The higher compliance costs will presumably be passed on to domestic clients as well, unless financial institutions choose to forgo business from the US. Add to this the legitimate concerns on privacy, data protection and transparency, as well as what is perceived as overreach by the US authorities, leading to resistance by countries such as China and Russia. All of these could have been addressed through wider public debate.
While it may be true that greater international cooperation to deter tax evasion and money laundering will pay dividends over the medium term through higher tax revenues, it is equally important for the government to tackle tax dodgers in India. That should not be done through rough methods but rather by better mining and usage of data generated by the Tax Information Network, simplification of tax laws, as well as clarity and stability of policies. Indeed, the Narendra Modi government should be asking why a $2 trillion economy has a tax-GDP ratio of just under 10 — from a high of 11.71 at the peak of the economic boom in 2007-08. The government needs to focus more on increasing the country’s relatively lower tax base through sensible policy measures and by stepping on the gas on execution.