Whoever gave the finance ministry the suggestion to project the agreements signed with the tax havens to the Supreme Court, as evidence of how serious the government is in closing the net on black money, probably needs to be produced in court too. The documents India has signed with 10 countries on the OECD tax haven list are not even the standard double taxation avoidance agreements. Instead, they are the much more restricted Tax Exchange Information Agreement.

What that means is if any of those countries change their tax laws and when India does its, they will tell each other about the changes. Where did black money, if stashed away in any of these havens, come into play in this exchange of information?

If that sounds a bit over-the-top argument to produce in a court, it is not the only one. Successive columns in this newspaper have pointed out how the debate is wrong in guessing the figure of black money in circulation and the economic rationale for its generation.

Instead, the finance ministry would have been served better if it had asked the Court to reverse its judgment in the Mauritius tax case. That was the case where the Court in 2003 disposed of a petition to cancel the India Mauritius Double Taxation Avoidance Agreement. Instead, the Supreme Court ruled that capital gains realised by foreign investors on their investments made in India, channelled through Mauritius based companies, will continue to be income tax-exempt.

To substantiate its position, the Court had also noted that it was quite legitimate for third parties (i.e., foreign investors) to enjoy treaty benefits by using the advantage of being shown as resident in Mauritius. The interesting part of the argument then was use of such treaties was a necessary evil to help promote ?economic development and inbound investment into developing countries?.

In subsequent years the poor officers of North Block have basically gone around upholding this line of argument. For someone to suddenly turn around now and suddenly claim it?s all wrong, is rich.

It is necessary to quote the details of that order, if the black money debate raging all over the place has to make any sense. The Supreme Court in the 2003 order also said if there are no anti-treaty shopping provisions in a treaty, then those benefits could not be denied to the residents of a country, even though such residents might be controlled by non-resident third parties. Basically, the Court made it clear that if India was concerned about treaty abuses it should introduce the requisite provisions in its domestic laws to prevent such use of the jurisdiction by non-residents of the country, meaning the investors with a Mauritius address.

This is a very key point made in the order. Black money or tax evasion has to be handled by introducing changes in domestic laws. The problem, irrespective of its size, cannot be solved by running after will-o?-the-wisp in foreign countries.

In every knowledgeable tax officers? assessment, the Mauritius-resident route has been the biggest conduit for tax evasion in the country. Since the time the Indian stock markets boomed, tax officials have found, nestled among the large number of genuine foreign investors using this route, rogues misusing it.

To plug the route, the government had two options. Ask the Court to annul the treaty or renegotiate the treaty with Mauritius. The Court, as we have seen, rejected the cancel option. So the government proposed an override clause in the India-Mauritius tax treaty. The clause said if there were proven violations of the residency status certificates or bogus procuring of the certificate itself by entities, the Indian government will have the right to override the treaty. The Mauritius government, despite long discussions, refused to accept it. The net result is the original provisions of the treaty with all its ills like treaty shopping stand. Yet neither the government nor the Supreme Court is inclined to look into this trail. The courts cannot be blamed solely. The BJP, which was in power at that time, had actually petitioned the Court to let the treaty stand. It was fighting a petition filed by an NGO that had won a victory in the Delhi High Court to abrogate the treaty.

Surprising? Not quite. For political parties, black money has been an issue only when they have lost power. They are unwilling to accept that the problem with black money is not when it stays stored in the icy vaults of Swiss banks or wherever. The problem emerges when the money moves out from there to travel through Mauritius and then into the Indian stock markets or into other parts of the economy as FDI, and the government writes in laws to allow treaty shopping.

Let?s see why? Suppose a Rs 500 crore travels from a Swiss bank to Mauritius and at the same time another Rs 500 crore comes from within India to the NSE for trade. Whatever may have happened earlier, since all securities market trade is taxed through the Securities Transaction Tax in India and the government has eliminated long-term capital gains tax on such transactions, the advantage of the Mauritius route vis-?-vis the Indian cash is gone. But what has not gone is the question of the source. The KYC norms of Indian banks and of Sebi will ensure the origin of the Indian money will have to be transparent.

But not so for the cash from Mauritius. No questions are asked and this is where Indian operators, when they want, use the loophole to do this round tripping. But, as the Supreme Court said then, it is for us to figure out how to improve our laws to get at the bottom of this problem. Generation of black money is therefore not a unique Indian problem. The problem is in the way we have constructed our laws. Running off to Basel and Bern will not give us any solutions.

?subhomoy.bhattacharjee@expressindia.com