Column: Look beyond the black money SIT

Jun 14 2014, 02:12 IST
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SummaryTackling tax evasion requires rationalisation of tax rates to reduce disincentives against voluntary compliance

As the world becomes increasingly globalised, it is becoming easier for taxpayers to make, hold and manage investments through financial institutions outside of their country of residence. Vast amounts of money are kept offshore and go untaxed to the extent that taxpayers fail to comply with tax obligations in their home jurisdiction. Offshore tax evasion is a serious problem for jurisdictions all over the world. In India, black money—in the international context generally equated with tax evasion—refers to funds earned on the black market, on which income and other taxes have not been paid.

In a significant development, in light of the directions of the Supreme Court, the government has constituted a Special Investigation Team (SIT) for unearthing black money. The SIT has been charged with the responsibility and duties of investigation, initiating of proceedings and prosecution in matters involving unaccounted money. The constitution of the SIT can be traced to the writ petition filed by noted jurist and former law minister Ram Jethmalani in the Supreme Court seeking the court's directions to help bring back black money stashed in tax havens abroad and initiate efforts to strengthen the governance framework to prevent further creation of black money. While the constitution of the SIT is welcome, the government may need to consider a number of other legislative and administrative measures to achieve the objective of preventing further creation of black money.

Cooperation between tax administrations is critical in the fight against tax evasion and in protecting the integrity of tax systems. A key aspect of that cooperation is exchange of information. In a recent development, the OECD, working with G20 countries, which includes India, has developed a global standard for automatic exchange of financial account information. On April 19, 2013 the G20 finance ministers and central bank governors endorsed automatic exchange as the expected new standard. The G20 decision followed earlier announcements by a number of European countries of their intention to develop and pilot multilateral tax information exchange based on the Model Intergovernmental Agreement to Improve International Tax Compliance and to Implement Foreign Account Tax Compliance Act (FATCA), developed between these countries and the United States.

The standard consists of two components: a) the Common Reporting Standard (CRS), which contains the reporting and due diligence rules and b) the Model Competent Authority Agreement (CAA), which contains the detailed rules on the exchange of information. The CRS describes the due diligence procedures

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