Offshore account holders claimed NRI status, bought entities from Mossack Fonseca for a few dollars.
Indians had discovered the advantages of going offshore — setting up entities in tax havens — long before the government and Reserve Bank of India (RBI) allowed resident individuals to take money out of the country. The Foreign Exchange Regulation Act (FERA), aimed at conserving foreign exchange, did not deter them despite the threat of criminal prosecution.
An eight-month investigation by The Indian Express, in collaboration with the International Consortium of Investigative Journalists (ICIJ), into over 11 million files of Panamanian law firm Mossack Fonseca has revealed that many Indians preferred British Virgin Islands and the Bahamas as an ideal destination for incorporating companies in the 1990s and early 2000s.
During the course of its investigation, The Indian Express came across two offshore entities, details of which are being withheld since these could have national security implications.
The scrutiny of data showed that lax regulatory environment in tax havens allowed companies to be bought ‘off-the-shelf’ for a few dollars from the likes of Mossack Fonseca with few questions asked.
In the more than 37,000 India-related files that Mossack Fonseca documents threw up, there were at least 20 individuals who had set up offshore entities before the RBI announced a new Liberalised Remittance Scheme (LRS) in February 2004.
The LRS then allowed a resident Indian to take $25,000 abroad every year. This could be gifted or donated, spent on medical treatment, used for children education or even invested in buying shares. The limit has since been increased in phases and currently stands at $250,000 a year.
It is entirely possible there are more resident Indians in the 2.6 terabyte information dump of Mossack Fonseca made available in a software platform to all members of the ICIJ. The Indian Express continues to investigate these files. Besides, Mossack Fonseca is just one of the many company incorporators in the world. There are at least three registered agents bigger than Mossack Fonseca.
The investigation so far by The Indian Express reveals that many individuals, who are shareholders in entities set up before February 2004, claim non-resident Indian status. If an individual is an NRI, he or she need not conform to investment laws prevalent in India. As far as taxation is concerned, the individual is required to pay tax in India only on the income generated and assets held in the country.
For instance, Darab Dubash, an Indian who set up an offshore entity 18 years ago in British Virgin Islands, said he was an NRI for the last 20 years. That being the case, neither did he require RBI permission to set up the BVI company nor Income-Tax reporting, he claimed. While Dubash said he ceased to own shares in the BVI company, a set of instructions from him suggest that all shares were transferred to Julius Baer Trust Company (New Zealand) in Guernsey and all balances in an earlier HSBC account too were transferred to Bank Julius Baer & Co.
Those in the shipping business also found it convenient to take the offshore route. As a Bhavnagar resident, Pirwani Abdul Kadar Kasambhai, who ventured into the ship-breaking business in 1990, said, “We chose Bahamas as one could set up a company there with a capital of one dollar only and also because ships were there.” Further, the liability of such a company was limited to the extent of its net worth or paid-up capital, a meagre $1, in this case.
Some are name lenders, as in the case of Bharmal Lodha, a merchant, who claimed that his employer made him a shareholder-director. His employer was the original shareholder in the British Virgin Islands entity.