Black Money: The Confidentiality Bogey

Legally speaking, the government cannot cite the Swiss DTAA for its inability or unwillingness to disclose the names of black money hoarders to the Supreme Court.

Over the past few days, a lot has been written on the Black Money controversy and the Supreme Court’s stinging observations on the Government’s handling of the issue. The Government’s position is (presumably) reflected by Finance Minister Arun Jaitely’s clarification on the issue on his Facebook page on October 18, 2014.

This clarification was issued before the Supreme Court came down on the government for its piecemeal approach in revealing the names of people who are believed to have stashed away black money abroad. Considering the controversy primarily concerns the law, let’s first examine the following legal issues to test the clarification:

One : Is there any truth in the government’s position that “premature and out of court disclosure of names of account holders” could violate India’s obligations under Double Taxation Avoidance Agreements (DTAAs)?

Two : Would it amount to violation of DTAAs if the government were to disclose the details of account holders to the Supreme Court in an affidavit?

Three : Factually speaking, have the details of account holders been secured under the DTAAs which contain confidentiality obligations? If no, and if they have been secured through “alternate sources”, would disclosure of that information to the Court or the public amount to violation of the DTAAs?

For the first two issues, let’s start with a scrutiny of the DTAAs with Germany, France and Switzerland.

DTAA with Germany

India’s DTAA with Germany, the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion, came into force on October 26, 1996. Article 26 of the DTAA with Germany, which provides for Exchange of Information between the countries, is provided below.

Based on a reading of Clause 1 of the Article, it is evident that only the “competent authority” identified by each country may seek or provide information. This is how the “competent authority” is defined in the agreement:

“The term “competent authority” means in the case of the Federal Republic of Germany the Federal Ministry of Finance, and in the case of the Republic of India the Central Government in the Ministry of Finance (Department of Revenue) or its authorised representative “

Clearly, the “competent authority” from India that can seek information under Article 26 is the Central Government itself through the Department of Revenue or its authorized representative. Upon receipt of information from Germany under the DTAA on black money hoarders, there is little doubt that it is not permissible for the government to disclose the names of black money account holders to the public.

However, it certainly appears possible to disclose the information to Indian tax authorities and courts which preside over tax-related issues. This seems all the more possible since the information is relevant to prevention of tax evasion, which is one of the objectives of DTAAs in general, including with Germany.

Upon disclosure of the information by the Department of Revenue to tax authorities (Department of Income Tax, and Central Board of Direct Taxes) or courts, the latter may in turn disclose the information in public court proceedings or judicial decisions. I haven’t come across any amendment to the DTAA which alters this position.

Therefore, as things stand, the central government has the liberty to disclose the information to the highest court of the land in a proceeding or petition related to black money and tax evasion, which wouldn’t amount to violation of the DTAA.

If Germany does raise any objection, surely the BJP government can depart from the Congress’s shameful legacy of not standing up for India’s rights and draw Germany’s attention to Article 26. Therefore, the DTAA treaty that NDA government is trotting out seems a bogey.

The provisions of the DTAA with France are almost similar to the one we have with Germany. Under the French DTAA too, it is possible for the government to disclose the information to the Supreme Court.

DTAA with Switzerland

The DTAA between India and the Swiss Confederation (Switzerland) came into force on December 29, 1994. The relevant portions of Article 26 of the DTAA, post the 2011 Amendment, can be read here.

The following reasonable conclusions can be drawn reading the key Article 26 of the Swiss DTAA and Para 10 of the Protocol to the DTAA:

1. The purpose for which information may be sought under the Swiss DTAA is significantly wider than the German and French DTAAs, and is not restricted to tax issues. For instance, if the money is being used to fund terror, India may have a legitimate interest in seeking details of the accounts and its holders.

2. Similar to the German and French DTAAs, the Swiss DTAA too permits disclosure of information to a court as part of taxation-related proceedings. Simply put, there is no need for in-camera proceedings. That said, the government cannot directly disclose the names to the public except through the medium of the Court.

3. Switzerland cannot refuse to supply information merely because it is held by a bank or a financial institution which wishes to respect its privacy obligations with its account holders.

4. Importantly, the provision does not seem to prevent disclosure in an affidavit to the Supreme Court until charges of tax evasion are filed against the evaders. In other words, regardless of the so-called “international practice”, none of the DTAAs require initiation of prosecution for tax evasion as a condition precedent before names are disclosed in court proceedings.

Unless there is any other instrument which dilutes this legal position, the government would not be violating the DTAA if it were to disclose all available black money information to the Supreme Court. Therefore, legally speaking, the government cannot cite the Swiss DTAA for its inability or unwillingness to disclose the names to the Supreme Court.

Also, when details of accounts of suspected individuals were sought by India under the DTAAs, it wouldn’t have been a random fishing expedition. A fair estimation of the unaccounted money would have been arrived at before the list of individuals was shared with Germany, Switzerland and France.

Unless the information shared by these countries has disproved the initial estimates of the government regarding the unaccounted money and established the innocence or bonafides of the account holders, there appears to be no hurdle in the disclosure of the information to the Supreme Court.

Moving on to perception-related issues, there are reportedly two lists, the Liechtenstein list and the HSBC French List. Both came out in the open under different circumstances that were outside the purview of the DTAA. Then why did the government deem it fit to invoke the DTAAs to secure the information knowing well that it would also attract the confidentiality obligations under the DTAAs?

Unless the government was of the opinion that the information made available in the two lists was inadequate to initiate prosecution for tax evasion, or that there were more names which went beyond these two lists, there was no need to invoke the DTAAs. If the government indeed believed that it could secure better and comprehensive information under the DTAAs of all suspects, it owes the Supreme Court and the general public an explanation.

Secondly, having opted for the DTAA route, a greater degree of candour and transparency was expected from the BJP in placing the true legal position before the court and the public, instead of citing confidentiality obligations which ex facie do not seem capable of passing muster in a court of law.

The BJP’s handling of the issue has given some much needed ammunition to its detractors. Modi himself has said the black money issue concerns “rashtraneeti” and not “rajneeti”. Therefore, the government should set aside all concerns about the PR implications and focus solely on national interest.

Finally, any reluctance on the part of the BJP in going after black money expeditiously is bound to give rise to perception that the BJP is no different from the Congress. The BJP’s new supporter base comprises people who trust the party to be more capable than the Congress in taking decisions that are in India’s national interest. A bungling on this sensitive issue will severely undermine the party’s credibility.

BJP is not a family-run outfit like the Congress, which brooks no criticism from within or outside. Hopefully, a genuinely democratic outfit such as the BJP will be more sensitive and responsive to a youthful nation’s disgust for graft.