An eight-month-long investigation by The Indian Express, in collaboration with the International Consortium of Investigative Journalists (ICIJ) and Süddeutsche Zeitung (Munich) has revealed a list of names of Indians who are linked to offshore entities in tax havens around the world. The list has been extracted from more than 11 million secret documents belonging to Mossack Fonseca, a law firm headquartered in Panama, which provided offshore companies to the well-heeled across the world, including 500 Indians. “PM Modi has himself requested that this matter be investigated… I think it’s a healthy step that these kind of exposés are being made,” Finance Minister Arun Jaitley has said. The government’s response is welcome. The issue of black money took centrestage in the lead-up to the 2014 general elections. Over the last two years, the Narendra Modi government has been accused of not doing enough in this regard. The finance ministry has stated that two similar investigations in the past have yielded results — in 2013, an ICIJ investigation (also done in collaboration with this paper) pointed to “links of 700 Indian persons” with business connections with off-shore entities, while information provided by the government of France in 2011 has led to Indian tax authorities completing tax assessments in 390 cases (the list of account holders was doubled after Indian Express-ICIJ investigations). The Panama Papers exposé is yet another opportunity for the government to not only investigate and prosecute the guilty but also to carve out clear regulations for the future.
By all accounts, since 2004, the regulatory framework with regard to capital convertibility has been changed almost every three years. Till 2004, the rules did not allow a resident Indian to transfer money to a foreign country for any purpose. But in that year, the RBI allowed the transfer of a sum of up to $25,000 under the Liberalised Remittance Scheme. Over time, this limit has increased tenfold. Through it all, however, the RBI allowed a regulatory gap, or rather confusion, to fester — it has not been clear whether Indians can set up entities abroad. By the time the RBI allowed the setting up of 100 per cent subsidiaries or joint ventures in foreign countries in mid-2013, such entities had already proliferated. Even now, it is not clear what is the exact legal position for those who acquired already existing companies — such as the ones that Mossack Fonseca supplied off the shelf. The government as well as the RBI must now spell out rules that are lucid and explicit.
The second key issue framed by the Panama Papers is of propriety, or its absence, on the part of those on the list. It is this — the adherence to the law not just in letter but also in spirit — that separates tax planning from tax avoidance. The finance minister has rightly said that those who did not take advantage of the compliance window last year to declare illegal assets abroad will find “such adventurism extremely costly”. It is time now for the government to do as it says.