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Strategy to tackle the menace of illicit funds

Posted on 25 January 2011,    
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Illicit Funds




The strategy adopted by the Government to tackle the menace of illicit funds is five-fold. This consists of:

i) Joining Global crusade against ‘black money’;

ii) Creating an appropriate legislative framework;

iii) Setting up institutions for dealing with Illicit Funds;

iv) Developing systems for implementation; and

v)  Imparting skills to the manpower for effective action.


1.  Playing a pro-active role in the Global crusade against illicit funds:



i) At G-20 Finance Ministers meeting held in London on 4-5 September 2009 and the Pittsburg Summit on September 24-25, 2009, India played an active role in finalizing the Declarations which included delivering an effective programme of peer review, capacity building and counter measures to tackle non-cooperative jurisdictions that fail to meet regulatory standards. As a result, all the tax havens have now agreed to end the bank secrecy. They have also agreed for not applying the principle of dual criminality while exchanging information for tax purposes.  Countries are also willing to enter into Tax Information Exchange Agreements in the absence of a tax treaty.

ii) India is playing a very active role as a Vice Chair of the Peer Review Group of the Global Forum on Transparency and Exchange of Informationfor tax purposes and making a positive contribution.

iii) India has also joined the Task Force on Financial Integrity and Economic Development in order to bring greater transparency and accountability in the financial system.

iv) India has joined as the 34th member of Financial Action Task Force (FATF) on 25th June 2010. FATF membership is important as it will helpIndia to build the capacity to fight terrorism and trace terror funds and to successfully investigate and prosecute money laundering and terrorist financing offences.

v) On 15th December 2010 India gained membership of the Eurasian Group (EAG), which is a Financial Action Task Force (FATF) styled regional body, responsible for enforcing global standards on anti-money laundering (AML) and combating the financing of terrorism (CFT) in the Eurasian region. The Eurasian Group is strategically and geopolitically important forIndia to fight financing of terrorism and money laundering through drug trafficking and fake Indian currency notes.

vi) India is actively participating as an observer in OECD.

vii) India is also a member of UN Tax Committee and Sub Committee on Transfer Pricing.


2.  Creating an appropriate legislative framework




India has Double Taxation Avoidance Agreements (DTAAs) with 79 countries. We needed modifications in as many as 74 DTAAs to broaden the scope of article of exchange of information to include exchange of banking information. The process was given an impetus when letters were issued to 65 countries (between April to November 2009) for initiating the negotiations to modify the relevant articles in DTAAs. Ongoing negotiations with 9 countries were put on the fast track.


DTAA with Switzerland was signed on 30th August 2010 and is now before the Swiss Parliament for approval. Once the Swiss Parliament grants the approval, DTAA will become operational.


While negotiating new DTAAs with 15 countries, we have ensured that articles concerning exchange of information are in accordance with the international standards and specifically provide for exchange of banking information.


Two new DTAAs have been notified and in 11 more, negotiations have been completed and are in the advanced stage of finalization. Negotiations are in progress in another 2 DTAAs.




India has prioritized 22 countries/jurisdictions for negotiations and signing of Tax Information Exchange Agreements (TIEAs). These jurisdictions are popularly known as ‘tax havens’.


Of these 22 prioritized countries/jurisdictions, we have completed negotiations with 10, negotiations are under progress in 4 and the response is awaited from 4 countries/ jurisdictions. These 4 wanted to sign DTAA instead of TIEA. At the instance of Indian Finance Minister, G20 communiqué has made mandatory the signing of TIEAs in case any country demands this instrument with low or no tax jurisdictions/countries.


To sum up, a total of 23 negotiations in line with international standards have been completed for DTAAs and 10 for TIEAs. In 31 cases, DTAA negotiations and in 5 cases, TIEA negotiations are in progress.


To enlarge the scope of DTAAs, provisions for assistance in tax collection abroad are included in some of the recently concluded DTAAs. A provision regarding assistance in tax examination abroad is included in all the negotiated or signed TIEAs which will enable us to send our officers abroad for tax examination. We are negotiating inclusion of this clause in the existing and new DTAAs also.



On 1st June 2009, the Prevention of Money Laundering Act (PMLA) was amended whereby the predicate offences listed in the Schedule to the Act were substantially increased in terms of the Acts covered and sections covered under such Acts. This amendment has tremendously widened the scope of money laundering investigations by the Directorate. In a number of such investigations, the Directorate has initiated overseas enquiries and forwarded Letters of Request to foreign administrations for not only collection/verification of information but also for obtaining evidence. The provisions of the Act also allow for causing attachment of the tainted proceeds located abroad by requesting the foreign administrations through Letters of Request issued by competent courts.


Transfer Pricing

The existing transfer pricing provisions which were introduced in the year 2001 do not have detailed provisions as compared to transfer pricing provisions of developed countries. There is need to upgrade these transfer pricing provisions to meet the challenges of growing intangible economy and various complex cost sharing arrangements. As per directions of FM, DGIT (International Taxation) has constituted a committee to look into the issue of revising the transfer pricing provisions. The committee will submit its report by March 2011.


Direct Taxes Code (DTC)


Government has proposed following specific new legislation for unearthing black money in the Direct Taxes Code Bill:

     For the purpose of levy of wealth tax, taxable assets have been defined to include deposits in banks located outside India in case of individual, unreported bank deposits in case of others, interest in a foreign trust or any other entity (other than foreign company) and any equity or preferential shares held in a controlled foreign company.

     The General Anti Avoidance Rule (GAAR) has been incorporated to deal with aggressive tax planning devices used to circumvent tax laws.

     Specific Controlled Foreign Company (CFC) rules have been incorporated to bring to tax passive income earned by residents from substantial shareholding in companies situated in low tax jurisdictions.

     A reporting requirement has been introduced making it obligatory on the part of resident assessees to furnish details of their investment and interest in any entity outside India in the form and manner as may be prescribed. 


3.  Setting up institutions for dealing with Illicit Funds


(i)Administrative set up in the Priority countries/jurisdictions for effective exchange of information, intelligence gathering and effective implementation of the provisions of international taxation and transfer pricing is being strengthened.

Recently Income-tax overseas units in eight countries namely USA, UK,Netherlands, Japan, Cyprus, Germany, France and UAE have been created. We are in the process of deploying officers at these locations. As on date, we have two Income-tax overseas units located in Mauritius andSingapore and these units are providing valuable information.


Once we finalize Tax Information Exchange Agreements   with priority countries/jurisdictions, we will review creation of more Income-tax overseas units depending  upon our requirements.


(ii) The existing set up in Foreign Tax Division (CBDT) is being strengthened. Additional manpower has already been put in position.


(iii) A dedicated Exchange of Information (EOI) Unit with direct access power is being created under the Foreign Tax Division of CBDT to ensure that the work of exchange of information is effectively carried out.


4.  Developing systems for Implementation

(i)Appropriate manpower policies have been formulated and put in place to identify and place suitable officers for speedy implementation. Technology platforms are being developed for online exchange of information with treaty partners.


(ii) For fair, swift and uniform application of law on international taxation and transfer pricing, the DGIT (International Taxation) will formulate a strategy by 31st January 2011. A committee has also been constituted to formulate a strategy for proactive and comprehensive representation before AAR, Tribunal, High Court and the Supreme Court by February 2011.


(iii) Steps have been taken to strengthen our Transfer Pricing audit. The TP regulation came into force in India only in 2001. It took us some time to gain expertise. Within a short span of time, Indian TP auditors have made adjustments worth Rs.45,000 crore. For cases under MAP, quite a substantial part of the additions have also been confirmed in MAP resolution, which speaks highly about the quality of the TP audits.


(iv) In addition to above the Foreign Tax Division has been successful in establishing contacts with various treaty partners in its efforts to collect the information about Indian citizens having bank accounts abroad. Information from Germany has already been obtained.  The matter is being actively pursued with other countries.


5.  Imparting skills to the manpower for effective action


(i)DGIT (International taxation) has sought willingness of officers to create a pool from which the officers to be posted in transfer pricing and international taxation could be selected.

(ii) 36 officers have been provided with intensive training overseas relating to International Taxation and Transfer Pricing during the first 10 months of this financial year. This process of continuous upgradation of skills is being institutionalized.

(iii) Special monetary incentives will be provided to the officers posted in these Directorates.



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