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Panama Papers revelation: do Indian laws have enough teeth to deal with it?

Saurav Datta | Updated on: 14 February 2017, 6:09 IST

Shocking expose

  • The Panama Papers expose has shaken the world, with many top leaders and celebrities under the scanner for alleged tax evasion
  • About 500 Indians are on the list, including Amitabh and Aishwarya Rai Bachchan, and many business bigwigs

Current situation

  • As of now, there are only allegations, no conclusive proof of guilt against these individuals
  • According to an SC decision, there\'s a difference between \'legitimacy\' and \'legality\', \'tax evasion\' and \'tax avoidance\'

More in the story

  • Does the law in India have enough teeth to deal with the case?
  • The Modi govt has promised strong action - is it really possible?

The explosive revelations by The Indian Express - that many high-profile Indians were shareholders (and even owners) in apparently bogus corporations in Panama - have brought to the fore a couple of questions.

First, what is and should be the boundary between tax evasion and tax management? This is important because while the former is an offence, the latter is not.

Second, are there laws with sufficient teeth to bring the offenders to book, once their guilt is established?

These two questions are interrelated.

At the very outset, it must be stated that as of now, there are only allegations, no conclusive proof of guilt. Justice (Retd) Arijit Pasayat, who is heading the Special Investigative Team (SIT) set up by the Supreme Court to probe the matter, has also stated this in no uncertain terms.

Clever tax management or money laundering?

An initial reading of the reports might give one the impression that those named in the lists have committed grave illegalities, and need to be subjected to public criticism.

But there is a wide gulf between public anger and legality, and it is the latter one must go by, because that's what the Constitution provides for.

There are a couple of Supreme Court rulings which could scupper whatever plans the ruling dispensation is promising to take.

There is a wide gulf between public anger and legality, and it is the latter one must go by

At the heart of the debate is the Supreme Court's Constitution Bench ruling in the 1985 McDowell case, in which the apex court tried to draw a distinction between 'legitimate' and 'legal'. It tried to draw a distinction between 'tax avoidance' and 'evasion', because the majority decided to ride roughshod over Justice OP Chinappa Reddy's minority ruling, which stated:

"We now live in a welfare state whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is, behind taxation laws, as much moral sanction as behind any other welfare legislation, and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation...

"It is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and... to avoid the devices for what they really are and to refuse to give judicial benediction."

Burial of the Westminster Principle

This reading and interpretation of the law relies upon the 'Westminster Principle' of taxation, and here it is apparent that all the persons named in the list were trying to reduce their tax burden.

As per this principle, as laid down in the 1936 House of Lords case of 'Inland Revenue Commissioners vs Duke of Westminster', "every man is entitled if he can to order his affairs so as to diminish the burden of tax".

Justice Chinnappa Reddy held that the principle of Westminster had been given a decent burial, and in that very country, where the phrase 'tax avoidance' originated, the judicial attitude towards tax avoidance had changed and the smile, cynical or even affectionate though it might have been at one time, had now frozen into a deep frown.

No one could now get away with a tax avoidance project with the mere statement that there was nothing illegal about it, he had said.

But, as legal scholars have outlined and explained in this treatise, the 'welfare state' is something which India's apex court increasingly loves to judicially renounce.

The second ruling

More hard-hitting is the Supreme Court's 2012 ruling in the Vodafone case, in which a majority of the court ruled in favour of protecting the 'investment climate' over legality.

The country's top court, in a ruling which many experts consider convoluted, ruled that tax-collection demands against foreign companies routing transacting through tax havens, even if permitted under law, should be secondary to the 'protection of investor confidence'.

Hollow promises

Prime Minister Narendra Modi has set up a special team to probe, and possibly act upon the Panama Papers allegations. But despite the high-soaring rhetoric, what precious little can this achieve?

For one, the PM and Finance Minister Arun Jaitley have promised a full-fledged investigation by a panel comprising members from the Central Board of Direct Taxes and other agencies. They want to probe into the allegations raised by 'investigative reporting'.

Modi's step is an eyewash and an attempt at a possible cover-up. He stormed into power on the 'bringing home the black money' plank, but going by his government's submissions before an apex court bench, it can neither compulsorily seek information from the countries concerned, nor launch prosecutions based on mere media reports.

This is because they are protected by double taxation avoidance agreement treaties which India has inked with them, and which provide for a certain measure of confidentiality.

Owing to treaties, the Indian govt can't compulsorily seek information from the countries concerned

Owning shares vs owning a company

Thus, in the final bargain, what might all this hue and cry and scrambled efforts bring, even if the government promises not to 'protect holy cows'?

Nothing. Because the laws, as they stand, make a clear distinction between 'illegality' and 'illegitimacy'.

Especially, because owning shares in a company (which the people named in the list have been accused of) is different and distinguished from owning a company, which these people have taken care not to do.

So, as of now, there might well be a lot of bilious material, but how much of that be able to withstand judicial scrutiny? That is the question of the hour.

Edited by Shreyas Sharma

First published: 5 April 2016, 10:20 IST
Saurav Datta @SauravDatta29

Saurav Datta works in the fields of media law and criminal justice reform in Mumbai and Delhi.