I-T draws blank as tax havens mum on shut accounts, defunct companies

The paper trail on stash money often vanishes beyond a mountain of Panama and Pandora papers. Several tax havens like Switzerland, Jersey, Guernsey and British Virgin Islands are refusing to disclose information on investment outfits and trust structures which have been dismantled or bank accounts that have been closed - particularly, if such accounts were shut even days before the treaty with the respective jurisdiction was signed.

It's a lesson that tax officials are learning the hard way as they strive to convert intelligence into evidence.

A Cumbersome Process

Arrangements to ringfence hidden wealth can be complex: the investment companies may be incorporated in one country, the discretionary trust or foundations linked to them are set up in another offshore centre, the bank accounts are likely to be with an old, trusted custodian like a Swiss Bank, and the person behind everything is an Indian passport holder residing in London, New York or Dubai.

Once the trust or the investment entity ceases to exist, tax haven authorities are under no obligation to give out the underlying information. Zurich banks may have archived details of accounts going back before World War II, but they shut the doors when asked for information prior to April 1, 2011 when the treaty with India came into effect.

Multiple Hurdles
"These expose (like Panama) aren't primary evidence. They become the starting point for a probe. From here on we write to the concerned countries or use MLAT (Mutual Legal Assistance Treaty for criminal matters) or other agreements to seek information. Most of the time information received is either very sketchy or leads us to another country used to create layers. So, we have to now write to the second jurisdiction to get information. The process is very time consuming and many a time leads nowhere," said a tax official.

A separate cell within the investigation department has been set up to focus on such enquiries. According to Sandeep Bhalla Partner Dhruva Advisors LLP, multiple enquiries have still not yielded the result which the government expected.

"Either those structures have been moved or the concerned jurisdictions do not respond to roving enquiries thus frustrating much headway in making assessments and collecting taxes thereon. Such information is generally used to carry out assessments under the Black Money Law or reassessment proceedings which leads to long-drawn litigation with the taxpayers. A new angle of PMLA is sought to be imposed during these investigations," said Bhalla.

For the Income Tax department which invokes IT Act and Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act (BMA), it makes sense to slap a notice only after independently collecting evidence that reveals concealment of income.