Holding overseas assets is not a crime by itself

The Panama Papers have dominated the news in the past few weeks—the leaks from law firm Mossack Fonseca about various persons being shareholders of foreign companies or beneficiaries of foreign trusts. There have been revelations about prominent people—politicians, businesspersons, sports personalities and actors—from various countries all over the world, holding such shares or being beneficiaries of such trusts, and the transactions of such companies or trusts. Unfortunately, in much of the discussion, the presumption has been that a person has committed a crime if he is a shareholder of a company or beneficiary of a trust named in the leaks. But is this really a crime?

Most countries around the world do not have exchange control regulations as in India. Therefore, residents of such countries can acquire shares of foreign companies. Even in India, under exchange control regulations, one can acquire shares in foreign companies under the Liberalised Remittance Scheme (LRS), which allows you to utilise $25,000 to $250,000 per year, the limit varying year to year. What was prohibited, and that too in between for a short period of about 5 years, was the utilisation of such funds for setting up a company; one could acquire shares of an existing company. Being a shareholder of a foreign company is, therefore, certainly not a crime, even if the company is controlled by you.

Many Indian companies have set up entities abroad, to hold and manage their overseas investments. Setting up of holding companies is a common worldwide phenomenon, facilitating better control and management.

If you are a beneficiary of a foreign trust set up by a close relative, or set up with legitimate funds remitted from India, that, too, is not an offence. You are only required to ensure that you pay taxes on amounts received from the foreign trust, and bring such money received back to India.

Similarly, if you were a non-resident who has now become a resident of India, you are permitted to hold assets abroad even after becoming an Indian resident. In fact, for the first two years, you are probably not even liable to tax in India on your foreign income.

What are offences are the utilisation of unaccounted money to set up such a company or trust, the failure to disclose income received from them, or the use of such entities to launder proceeds of corruption. Utilisation of unaccounted money to set up such a company or trust or failure to disclose your income from these are tax offences for a tax resident of India, since his worldwide income is taxable in India. Such failure should certainly invite action under the income-tax Act, or under the black money Act. However, these are not offences in India for persons who are not residents, since only their Indian income is liable to tax here.

Such a tax offence is, however, certainly not as serious as the offences of corruption or money laundering. Unfortunately, the focus has not been only on such cases, and the issue has been sensationalised by tarring all the persons in the list with the same brush. This will result in the actual criminal cases escaping attention, and perhaps getting away scot-free, taking advantage of the smoke and confusion created in respect of the genuine cases.

This also shows how outdated our tax laws have been in an increasingly globalised world. The requirement of disclosure of foreign assets by tax residents was introduced just three years ago, after the HSBC leaks. The manner of taxation of such foreign entities controlled from India will also soon undergo a change, due to the ‘place of effective management’ tax residency provisions becoming effective for foreign companies from April 2016. Under this, a foreign company managed and controlled from India would be taxed in India.

Some persons have been clamouring for restriction of the LRS and tightening of exchange control regulations. That would be a tragic knee-jerk reaction, without even knowing the extent of misuse as revealed by the leaks. Misuse by a few should not result in rationing of foreign exchange for everybody.

This is something that the country cannot afford. We need to realise the potential of our enterprising people, and that is possible only if they are given the freedom to do so. The monitoring of such freedom can be accomplished by requiring reporting of such transactions, and ensuring proper processing of such information. We necessarily have to be part of the globalised economy, and not a country in isolation. Our tax laws and exchange control regulations need to reflect that.