The progressive realisation of human rights and availability of public services such as education, health, nutrition, drinking water and sanitation, etc. depend on how effectively national governments mobilize resources in the country. An integral part of this is national tax policy. India is an outlier among large developing countries with regard to its low tax-GDP ratio of 17 per cent, with a high dependence on indirect, consumption taxes. Indirect taxes are regressive and indiscriminate in nature, as the rich and the poor pay the same levels of taxes on consumable products, regardless of their income levels and ability to pay tax.
While progressive and effective national tax policies are vital to raising domestic resources, the secrecy mechanisms of the shadow financial system limit the ability of governments to raise revenue on their own. The result is illicit financial flows – cross-border movement of funds generated through a range of activities – including tax evasion, misappropriation of state assets, laundering proceeds of crime, and artificial profit shifting by multi-national corporations by abuse of tax laws and bilateral tax treaties. Illicit financial flows (also known as black money or dirty money in certain countries), directly aided by secrecy in the global financial system, are deeply corrosive of national revenue, inhibit the realisation of human rights and undermine institutional accountability.
India’s efforts to curb illicit financial flows have been manifold, and the country has enacted several tax transparency measures:
- Automatic Exchange of Tax and Financial Information between Jurisdictions: Criminals and tax evaders take advantage of a porous financial system. While illicit money can transcend borders with the click of a button, efforts on part of government authorities continue to be constrained by national borders as their jurisdiction extends only to their own country. Existence of tax havens and an efficient industry of tax lawyers and bankers facilitate financial secrecy and enable people to move their assets offshore. The Organisation for Economic Co-operation and Development (OECD) and the G20 have devised the standard for tax authorities to be able to exchange citizens’ tax information with each other automatically. This measure is termed Automatic Exchange of Information, allowing information like names, addresses, tax identification numbers and account balance to be exchanged at regular intervals with the account holder’s country’s government. India joined the standard of Automatic Exchange of Information in 2015 and started exchanging information in 2017. By way of this measure, Indian tax authorities will be able to receive tax information regarding Indian citizens from other countries. Thus, if an Indian citizen has an account in a Swiss bank, and has a balance over a certain threshold, their information will be sent to the Indian tax authorities automatically. This will not only deter tax dodging and crime, but also enable investigations on part of tax authorities.
- Registry of Beneficial Owners (True Human Owners) of Companies: In most countries across the world, company registration laws do not require ownership information. Thus, a company can easily be set up without the real human owner being identified as the one benefitting from her or his company. This results in a spider web of anonymously held companies, enabling embezzlers, arms traffickers and drug dealers to be business owners, without being identified as the ones ultimately controlling or profiting from such companies. The Panama Papers investigations revealed how shell companies were used to supply fuel to the Syrian Air Force, thus financing the deaths of thousands of Syrian civilians; and how a human trafficker used anonymously owned companies to run his racket. Anonymous companies, perfect for hiding ill-gotten money, more often have few employees and do not conduct any real business. In 2016, the United Kingdom became the first country to create a fully public registry of beneficial owners of companies incorporated there, identifying the true human owners of all companies registered in the U.K. Many other countries have signalled their support for public registers of beneficial owners. India has implemented a law for creating a registry of beneficial owners of companies registered in India, in the Companies (Amendment) Act, 2017. This policy measure will ensure that the Registrar of Companies, under the Ministry of Corporate Affairs, will have information about the real human owners of each company set up in India – which will help track down the real humans responsible for any crime or tax abuse.
- Country-by-Country Reporting of Multi-National Corporations’ Operation and Tax Data: There is a lack of clear and transparent information about the operation of MNCs. Currently, MNCs are able to exploit loopholes in domestic and international tax laws to shift their profits from one country to another, often through tax havens, and avoid paying their fair share of taxes in the countries where MNCs have a business presence. This implies that MNCs may be making profits in India, for instance, but could easily shift their profits to a low tax jurisdiction like Hong Kong and justify that transaction as a payment for the use of a patent. Profit shifting is an abusive tax practice that severely impacts the tax base of developing countries. MNCs report on their profits, revenue, taxes paid and number of employees in an aggregate global manner, which does not clarify a corporation’s operations in a specific country. The G20-OECD Base Erosion and Profit Shifting (BEPS) project requires MNCs with an annual consolidated revenue of over €750 million (about Rs. 5,500-6,000 crore) to report information regarding revenue accrued, profits earned, taxes paid, number of employees, assets, etc. in a disaggregated, country-by-country basis. This greatly enables governments across the world to ensure that MNCs operating in their jurisdictions pay their fair share of taxes, and spot irregular information and activity that needs further investigation. India announced the adoption of Country-by-Country Reporting requirements for MNCs in the Union Budget 2016-17. The new documentation regime was applicable from April 1, 2016 with the first filing due by November 30, 2017.
While India is proactive with regard to tax transparency measures, it is also necessary that the country considers comprehensive national tax reforms. As part of India’s commitment to the Sustainable Development Goals, India must strengthen the mobilisation of its domestic resource by gradually increasing its tax-GDP ratio. Greater emphasis should be placed on direct taxes, like personal income tax and corporate income tax, as direct taxes are progressive in nature. India should also introduce other direct taxes such as inheritance tax and estate tax, in order to generate a greater proportion of its taxes from direct taxes and reduce the burden of indirect taxes. India should also invest in increasing the capacity in its tax departments to have effective tax administration, investigation and litigation. This will help finance other Sustainable Development Goals that aim to improve the quality of every living being’s life.
The SDGs are urgent and complex, and need concerted efforts if they are hoped to be achieved. Financing the SDGs is thus crucial, and the battle begins with tax.
Featured Image for representational purposes only.