India’s Black Money law, the statute that arms the tax office to go after citizens with secret foreign bank accounts and assets, will be tested before the Swiss courts this year.
About half a dozen appeals are coming up for hearing to stop Swiss authorities from sharing information with India on the grounds that not only can the harsh law be applied "retroactively", but it can also be used to impose stricter "criminal" sanctions than those that would have been possible at the time the offences were committed--features which are incompatible with the Swiss legal system and values, lawyers familiar with the subject told ET.
As evidence, the appellants point out the reference to the Black Money Act in the "information request" from the Indian Income Tax (I-T) department to Switzerland, along with notices and summons received by them from the Enforcement Directorate (ED), which can prosecute persons involved in money laundering. Data received by the I-T department is routinely shared with ED.
In a ruling last year, the Swiss Supreme Court observed that "in accordance with the 'principle of speciality', information obtained through administrative assistance may only be used for tax purposes mentioned in the agreement."
The current provisions of the "exchange of information" clause under the India-Switzerland Tax Treaty were agreed back in 2011, while the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act (commonly called the Black Money Act) came into force in 2015.
"This is particularly relevant for two reasons. First, there are arguable grounds to suggest that the criminal tax provisions under the Black Money Act are different from those under the Income Tax Act, for which the Tax Treaty was entered into. Second, the Indian tax authorities (based on their position in other cases) are likely to use the information received under the Tax Treaty to invoke the consequences under the Black Money Act for periods even prior to the year 2015, "said Ayush Tandon, partner at the law firm AZB & Partners.
The I-T Act can be used to claim tax on 11-year old undisclosed income, but the Black Money Act empowers the tax department to question assets acquired decades ago but discovered now: the year in which the tax department gets hold of the information is the year for which income is deemed to have been earned by a person under the lens. (Section 51 of the said act deals with the punishment for a wilful attempt to evade tax.)
"Two basic and cardinal rules in the mechanism of information sharing among nations are that such sharing should not be contrary to the public policy of the nation sharing information, and that such nations are also not expected to undertake steps that are at variance with their local laws. In the present cases, if Swiss were to share information knowing that the end use could be the invocation of a criminal law with retrospective applicability, this participation could be viewed as a violation of their public policy as Swiss local laws don’t permit retrospective application of criminal laws," said Ashish Mehta, Partner at Khaitan & Co.
It will thus be interesting to see how the Swiss courts deal with this situation now that Indian authorities have themselves referred to the Black Money Act in their requests for information.
Two tax officials, speaking on condition of anonymity, admitted that "criminal punishment the law empowers" was a hurdle the department was running into. In most cases, Swiss authorities have taken this stand to hold back information while responding to enquiries, "said one of them. "Besides, almost all Swiss references in the Swiss HSBC account leaks got this response where they said that they could not share any details prior to 2011 unless there was a criminal law infringement, "he said.
The Swiss apex court, which heard one such matter last year, however, ruled against the appellant and allowed the sharing of information as there was no evidence to substantiate that Indian authorities may subsequently invoke the criminal law. "This was because the tax request in that particular case made no mention of the Black Money Act.. which is not the case for appeals coming up this year," said a person aware of some of the case details. The court, nonetheless, has said that the information transmitted cannot be used for criminal law purposes outside the scope of administrative offences. Use for other, non-treaty purposes, such as criminal prosecution for money laundering, is possible only after prior approval by the Swiss authorities.
"One of the primary conditions for administrative assistance in tax matters (with major countries like Singapore, Switzerland, etc.) is that the information requested by India must be "foreseeably relevant" for the purposes of income tax or an identical or substantially similar tax in India," said Tandon.
In the Swiss legal system, the Federal Tax Administration is the first level of appeal, followed by the Federal Administrative Court (equivalent to the High Courts in India) and finally the Federal Supreme Court.
APEX TAX BODY SET DEADLINES
New Delhi, however, is bullish that the data obtained from the common reporting standard (CRS) would come in handy. Earlier this month, the apex direct tax body, CBDT, issued an internal action plan for FY 22–23 asking officers to aim at completing investigations initiated under the BM Act by the end of the year. This includes matters related to all the offshore leaks by the International Consortium of Investigative Journalists and cases developed on information received through intelligence units, FATCA, CRS, and others.
"The probe into the Pandora Papers is on the priority list with the target for classification of actionable and non-actionable cases set at May 31 and the deadline for reference to foreign competent authorities set at June 30. The deadline is not time-barring to probe the offshore accounts but just an action plan to streamline the investigation, "an officer privy to the development told ET.
Earlier, Switzerland was not sharing information in response to requests that were based on stolen data in view of certain local laws. "However, later, there was a Swiss Federal Court ruling wherein it was held that as long as India did not buy stolen data, coupled with the fact that India gave no explicit statement about the source of information, information could be shared. This has been a big political issue in India as well as globally, and there have been regular meetings and interactions between the Ministry and their Swiss counterparts, "said Mehta.