Book review: Thin Dividing Line by Paranjoy Guha Thakurta & Shinzani Jain takes reader through money laundering and ways to do it

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Published: January 21, 2018 5:48 AM

A book that examines money laundering and how it can be done under the cover of perfectly legal actions.

book review, thin dividing line, black money, white money, money laundering, money laundering process, money laundering ways, tax payment, tax rulesA book that examines money laundering and how it can be done under the cover of perfectly legal actions.

Money laundering is quite a hot topic of discussion after a series of news breaks on the issue. But it is difficult to nail the culprits when loopholes of the tax rules of the country have been used effectively to reduce tax payments, or to avoid paying taxes. These are perfectly legitimate routes used to avoid paying taxes, where prima facie people have done nothing wrong. But it’s not fair play either. The book, Thin Dividing Line by Paranjoy Guha Thakurta and Shinzani Jain, takes readers through the labyrinth of deceit that is used subtly by some of the big corporate players to escape tax. Mauritius is the main route chosen by individuals and corporates to lower their tax liability. Other centres of tax avoidance are Singapore, Luxembourg, Cayman Islands, etc, which have double taxation avoidance agreements with India. The modus operandi is fairly simple. Set up dummy companies in these countries. Depending on the kind of laws anyone wants to escape, there could be a chain of interconnected dummy companies that are owned by persons or companies indirectly. Tax authorities normally stop at enquiring about, say, three or four links that can’t be traced to the culprit directly. This front is used to invest in, say, the Indian stock market, where the gains are not taxed since there is a double taxation avoidance treaty already in place. The proceeds are, however, taxable in the other country. Now, Mauritius does not have such a tax and, hence, there is no need to pay tax on the entire gains made. Such loopholes exist and are fully exploited by companies in a definite manner.

This is what is, broadly speaking, the thin dividing line between managing and avoiding paying taxes. Can we consider this to be a wrongdoing, or is it a legitimate action permitted by law that may not be in the true spirit? Here, the authors go into detail and quote extensively from what the courts, lawyers, corporates, critics, etc, have said about such activity. When the government brought in GAAR (general anti-avoidance rules), the idea was to distinguish between genuine business carried out in, say, Mauritius and the case of fronts maintained to dodge Indian laws. The challenge has always been how one distinguishes between the two. A major issue for the government is to ensure that the government of Mauritius does not take offence, which has happened in the past when such investments were questioned. Countries give incentives to create a financial hub, which, in turn, gets support from other countries, as it helps to channel investment. In such cases, the Indian government had to retract and redraw the agreements to ensure that no umbrage was taken by Mauritius.

Another problem that afflicts such agreements is that the stock market reacts adversely whenever such loopholes are sought to be plugged. In our country, the stock market is taken to be sacrosanct and nothing that destabilises it is tolerated. The usual argument given is that if there are such checks put in, genuine FPI investment would be deterred. Hence, no government is prepared for such a backlash. Part of the reason is that it can upset the entire system and as considerable political funds are stashed away in these markets, self-interest is also a consideration. Further, several top entrepreneurs who go right through the IPL franchise have also used these connections to reduce tax payments. This is what the authors highlight by detailing how these transactions have panned out and created controversy.

Probably one of the most controversial instruments used for round tripping are PNs, or participatory notes, where the investor is financed by unknown or undisclosed names of persons who would normally be citizens of India. Such PNs are registered with the Securities and Exchange Board of India (Sebi) and are, hence, regulated entities. However, the final owners could be sitting in India and channelling domestic funds through this route to make non-taxable gains. The amount involved is quite large and, by March 2017, was as high as Rs 1.78 lakh crore.

At a different level, the authors also speak of the retrospective nature of action for the government and tax authorities. Here, the Vodafone case has been examined in great detail, where the reader can take a call on which side she would like to be on. The case was unique because there was a claim made by the tax authority on a sale transaction done overseas that involved the Indian company. The case has gone right up to the International Court of Justice given the wider ramifications.

Towards the end, Thakurta and Jain also cover the issue of political funding, which is another source of channelling of illegal funds, thus completing their discourse on the subject. Coming after the rather remarkable book titled Sue the Messenger, Thin Dividing Line is another investigative treatise on this subject. It has been researched in great detail and while the authors provide their view, all the facts and points made are from widely quoted sources, which ensures that objectivity is maintained in presenting facts.

It is essential that the government, as well as law makers, read this book and take the issue seriously. There is a need to reconsider whether all these tax arrangements with different countries do deliver value to the nation or only help those who are quick-footed in escaping tax. While having channels like the silk route for drug trade is illegal, use of tax havens is not. This is a problem across the world, with several large reputed companies using these havens to avoid paying tax. Presently, there is nothing wrong as it is permitted. The question is, why does no one bite the bullet and pull the plug? This will probably be the question the reader will ask after reading this book.

Madan Sabnavis is chief economist, CARE Ratings

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