09/11/2017 8:32 AM IST | Updated 09/11/2017 10:10 AM IST

Paradise Papers And India: Just Another Ballyhoo Or A Real Exposé?

Is setting up companies in tax havens illegal?

AFP/Getty Images
An employee walks through a door at the offices of the law firm Appleby in Hong Kong on November 8, 2017. The Paradise Papers documents, which are mainly from the offshore law firm Appleby, have been shared with international media via the US-based International Consortium of Investigative Journalists.

The "Paradise Papers" may have helped the BJP government in getting away from some of the bad memories of demonetisation on its anniversary, but beyond that, do the revelations mean much?

Just as in "Panama Papers", the new pile of leaked paperwork name and shame a lot of Indians to such an extent that in public imagination having an offshore account has become synonymous with black money, slush funds, tax evasion and being super rich.

The list from the Papers, as in the case of its predecessor, has become predictable: it will have some big names, the usual suspects, some unknown names and some movie actors. And the storyline is as confusing as before because it doesn't say what's illegal, if people indeed have committed a crime, and if some of them are richer than we think.

The government too will sit on them for years even as the opposition demand quick action and white papers.

The only difference this time is their place of origin - the previous set came from Panama and, the present from Bermuda, both "tax havens", where you either pay no taxes or low taxes, possibly gain better returns on investments, and enjoy a lot of incentives to keep your money and set up companies.

The devil is in the details. Let's see if there's anything apparently illegal and if disclosing names of a few - reportedly there are about 700 plus Indians in the list - make any difference to the "war against black money."

There are two critical questions in this regard: One, is having an offshore account, and transferring money out of India, illegal?; and two, is setting up companies in "tax havens" illegal?

The answer to both is a big NO.

It's not just some big names or movie stars that have offshore accounts, but tens of thousands of Indians given the number of Indian expats in different parts of the world. Many Indians, even after ending their expat life retain those accounts while people who keep moving from country to country may have created accounts in multiple countries, including in the Caribbean islands and Mauritius that are the popular "tax havens" that we know.

And all of them are perfectly legal, if disclosed to the appropriate authorities in India and complied with what the Indian law says. One doesn't even need to be a non-resident Indian to set up an account abroad; one could do it even for the heck of it and park a sizeable amount of one's wealth there because that's perfectly legal.

One, is having an offshore account, and transferring money out of India, illegal?; and two, is setting up companies in "tax havens" illegal?

Under the Liberalised Remittance Scheme of the government, Indians can take out of the country USD 250,000 (about Rs 1.6 crore by the present exchange rates) every year without any hassle. If one avails of this facility, one can take out a million dollars in four years. And this money is not restricted to opening a foreign currency account or transferring to one's own account, but can also be used for lending to others, acquiring properties, investing in companies and other instruments, setting up wholly owned subsidiaries, joint ventures and so on. Corporates have a completely different scale.

READ: A Year After Demonetisation, It's Safe To Say That Modi's Ambitious Gamble Did Not Pay Off

Now, the second question: Is setting up companies in tax havens illegal? The answer to this is also mostly NO, because most of the tax havens owe their existence to other countries' concurrence. If India permits investments from countries such as Bahamas, Bermuda or Mauritius, they are not illegal. It's not just India that recognises the legality of most of these tax havens, but also other countries, and that's why these "Papers" contain all kinds of nationalities.

Tax havens are a result of international tax-competition and exist not only because they offer lower or no taxes, but also because of the extreme ease of doing business, which includes the possibility of hiding the real identity of the investor by creating layers and layers of investment companies.

In fact, the competition between the tax havens is offering more attractive options to park one's money - if one is uncertain about the socio-economic stability of one's own country - and make investments globally including in India. If a country offers no capital gains tax on the profits made on one's investments in India, and the latter agrees to that, it's perfectly legal. In fact, from an investor-perspective, that is the wise thing to do. If there's an additional incentive of legally hiding one's identity, it makes the offshore option all the more enticing.

That's precisely why one finds even small names (say actor Sanjay Dutt's wife) or some recurring names (say, Amitabh Bachchan) and a few companies associated with them in the list. Probably, people genuinely want to invest either in India or in other attractive places and have just set up a company or a number of companies because it hardly needs any capital, and the paperwork can be completed through a single window in a day or a week.

It's as simple as opening a bank account anticipating a possible transaction. Some of them do end up as investment vehicles while most of them just lie dormant.

Nothing else explains why Mauritius, a country with just a million population and no Swiss Bank swankiness, account for bulk of the FDI in India. In fact, Mauritius, along with the city-state of Singapore, account for 50 per cent of the FDI in India. For the former, it fetches more than 10 per cent of its GDP and employs nearly 20,000 people, a sizeable number given its population.

In fact, Mauritius, along with the city-state of Singapore, account for 50 per cent of the FDI in India.

When India was renegotiating the Double Taxation Avoidance Treaty that had been in existence with Mauritius since the 1980s, its financial service sector raised a big hue and cry because it was part of their lifeline. The most contentious was Clause 13 of the agreement, which allowed capital gains to be taxed in Mauritius, where it's practically nil. Therefore, if anybody making an investment from Mauritius sells their business in India and makes a profit, there's hardly any tax on that. Just by routing their investments through Mauritius, or the Bahamas, if one can legally make windfall gains on taxes alone, why not?

If India makes a policy that the capital gains ought to be taxed in India, not in the country of origin of investment, most of the investments from such tax havens may disappear. Will India do it? Highly improbable.

READ: Why Modi's Government's Apathy Towards The Suffering Caused By Demonetisation Is Plain Immoral

The Papers also raised a lot of noise without any discernible clarity, which is probably an unavoidable fallout when one gets a ton of documents and one doesn't know how to make a cogent storyline out of them, or there's no storyline.

The story on former telecom minister Kalanidhi Maran is a case in point because not only doesn't it say anything, but it also obfuscates. In his Aircel-Maxis case, what the CBI court had said was that the Malaysian company might have invested in Sun, but there was no evidence to prove that it was a payback. Mere suspicion didn't make a case, the court said. Do the Paradise Papers say anything more than that the Malaysian company was investing, which is a publicly known fact?

The Papers also raised a lot of noise without any discernible clarity...

The real issues of black money, hawala-transfer, over-invoicing, tax evasion and round-tripping that the same offshore accounts and companies in tax-havens can facilitate are still unanswered and will continue to be unanswered because they originate from India and the government of India doesn't know what to do.

The critical question is if a power company over-invoices its coal import and evades tax as well as moves huge amounts of money out of the country "legally", or if a debt-ridden business tycoon siphons off massive bank-loans through bogus overseas deals, does the country have the means to prevent them? Or at the lowest level, if a movie actor gets paid in Dubai for his work in India through a proxy and acquires wealth there, does the government have the means to prevent or detect it?

A few leaks and a few names won't make any difference although it suits people such as finance Minister Arun Jaitely to show some momentary excitement. For instance, in July, Jaitely said that the Panama Papers helped unearth black money worth Rs 19,000 crore, while according to the Central Board of Direct Taxes (CBDT) on Tuesday, it was just was just Rs 792 crore.

Clearly, both the media and the government lack the distinction that's necessary - to tell people what's legal and what's illegal. By obfuscating, they just create the boogey of corruption that subverts the real issues of people and the real threat of the nexus between illegal wealth and crime.

Just publishing names and insignificant details doesn't make any sense and would only help to deepen the apathy and cynicism.

Also on HuffPost India:

Photo gallery Bend It Like Our Netas See Gallery