19 Apr 2016 12:51 IST

Acting tough: will India blacklist Panama?

Centre had take similar action against Cyprus in 2013

Should India blacklist ‘Panama’ as a ‘non co-operative jurisdiction’ on the lines of the action it took against Cyprus in November 2013?

This is a question that is running uppermost in the minds of economy watchers and tax experts if not the policymakers ever since the ‘Panama Papers’ revelations came to light.

The big issue is whether Indian government would take the lead in the form of a unilateral action or wait for the international community under the aegis of G20 to penalise Panama.

Already G20 — after the Panama Papers expose – has moved on this front, asking OECD to come up with objective criteria (by July) to identify non-cooperative jurisdictions with respect to tax transparency. This is clearly aimed at Panama, which has resisted implementation of OECD championed global pact on automatic information exchange of banking clients.

The India angle is quite apparent in the ‘Panama Papers’ scandal with more than 500 Indians having reportedly utilised the services of tainted Panamanian law firm Mossack Fonseca to open offshore accounts and float shell companies abroad. The ‘Panama Papers’ investigations revealed that Indian tax authorities had in the past sought information from Panama on transactions of certain Indian residents, but had met with little success.

Armed with a ‘toolbox’ of measures introduced in 2011, the Centre had in November 2013 blacklisted Cyprus as a non-cooperative jurisdiction. This had consequences on ‘withholding tax’ and ‘transfer pricing’ with regard to transactions undertaken by Indian residents with entities in Cyprus.

Tax experts say that the income tax law provision Section 94A could be invoked against any country or territory where the government feels there is no effective exchange of information.

There is nothing to say that India should have a double tax avoidance agreement or tax information exchange agreement with the territory in question before blacklisting a jurisdiction, they noted.

Moreover, the recent Madras High Court order upholding the constitutional validity of Section 94A (conferring power to blacklist a country or a territory as a non-cooperative jurisdiction) has come as a ‘shot in the arm’ for the Centre, say tax experts.

The Madras High Court also dismissed writ petition challenging the validity of the Centre’s notification categorising Cyprus as notified jurisdictional area (non-cooperative jurisdiction).

Aseem Chawla, Partner, MPC Legal, a law firm, said that the Madras High Court order takes a topical note of Panama episode (although not the subject matter) and highlights the importance of the same.

“At the same time careful diligence on the part of revenue authorities is expected lest any premature action is taken in haste,” Chawla said when asked if there was a case for blacklisting ‘Panama’ on the lines of Cyprus. Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a CA firm, said that the Madras High Court order underscores the importance of information exchange in the current environment where information exchange between treaty partners is absolutely necessary to avoid Base Erosion and Profit Shifting (BEPS).