`Parliament has a role to play now'

Interview with S.K. Jha, former Chief Commissioner of Income Tax.

Shiva Kant Jha, former Chief Commissioner of Income Tax, who retired from the Indian Revenue Service in 1998, recounts that senior officials in the Income Tax Department always regarded the Mauritius route with suspicion. He was away in Darbhanga, his hometown in Bihar, on October 7 when the Supreme Court delivered its judgment in favour of the government, allowing it to continue ignoring the multiple loopholes in the Indo-Mauritius Double Taxation Avoidance Convention (DTAC), which enables foreign investors operating from Mauritius to avoid paying any taxes in India.

Earlier, in 2000, he had successfully moved a public interest petition before the Delhi High Court, bringing before it his long and distinguished experience not only as a tax administrator but also as a legal practitioner in the Supreme Court Bar in such matters. In its judgment the High Court commended Jha for having "done a noble job in bringing into focus as to how the government has been losing crores and crores of rupees by allowing an opaque system to operate."

Shiva Kant Jha refuses to accept defeat after losing the battle in the Supreme Court. He informed Frontline that he is about to file a review petition in the Supreme Court. Jha spoke to V. Sridhar, from Darbhanga, about the history of the DTAC, the manner in which the political executive threatens to abridge national sovereignty and about the crucial role that Parliament needs to play to recover lost ground. Excerpts from a 90-minute interview:

What motivated you to file the petition challenging Circular 789 issued by the Central Board for Direct Taxes?

I have no political leanings. I do not belong to any organisation. I am just an ordinary citizen. My family participated actively in the Indian freedom movement. I always felt that the DTAC was contrary to the statutes of the Income Tax Act (ITA), particularly Section 90. I also believed that the provisions of the DTAC are contrary to the concept of avoidance of double taxation, which is a precondition under Section 90 of the ITA. Article 73 contains provisions by which power is conferred to the executive. One of powers is to enter into treaties with foreign countries. But the executive can tinker with anything pertaining to taxation only within the parameters set by the statutes. These parameters are set by the preconditions prescribed in Section 90 of the ITA. The law clearly specifies that on anything pertaining to taxation on which there is parliamentary enactment, the executive cannot enter into a treaty that is beyond the powers granted to it by Parliament. The Supreme Court has said that the power of entering into a treaty is a part of the inherent power of a sovereign state.

Why did you challenge the government's circular?

It started rather dramatically. As early as 1994 I had heard from colleagues about the manner in which the Indo-Mauritius DTAC was being abused by unscrupulous elements. Senior officials in the Income Tax Department felt that the provisions of the DTAC were not fair.

The agreement was concluded in 1982 (notified in 1983) when Indira Gandhi went to Mauritius, accompanied by Pranab Mukherjee, the then Union Finance Minister. Till 1991 it was mainly Indians who routed funds from abroad who were misusing the DTAC. But the abuse was not widespread. After the opening up of the economy in 1991, Mauritius, by using a network of tax treaties, began inviting investments from abroad to route them to India. Mauritius began to sell the benefits of the bilateral tax treaty as wares for investors to buy. Mauritius has no tax on capital gains. In India they would not be taxed because the Indo-Mauritius DTAC protects them. The DTAC provides that the tax on capital gains made in the share market would be in the country of residence of the entity. Any company incorporated in Mauritius is granted a certificate of residence. As a result of this, entities from third countries can get themselves incorporated in Mauritius, can invest in India, make gains, and avoid being taxed either here or in Mauritius. This is completely different from what happens to, for instance, a company from the United States investing in India. The provisions of the Indo-US DTAC results in companies being taxed according to the laws in both countries. However, the Indo-U.S. treaty provides for relief in the incidence of tax that entities pay in India and the U.S. so that they are not taxed for the same reason in both countries, which is what double taxation is all about. Mauritius modified its legal regime and framed certain laws.

These measures resulted in Mauritius becoming a tax haven. A tax haven is one which provides a very liberal regime of practically no taxes. But more importantly, a tax haven has an opaque system. It is virtually impossible to get any information about transactions and about the persons responsible for them. Suppose Al Qaeda floats an organisation in the Bahamas and wants to send funds to India to destabilise our country, it would be very easy for it to float a subsidiary in say, Panama. The company in Panama could float another one in Monaco, which in turn could float a subsidiary in Mauritius, which could transact here in India. The Indian beneficiary of this arrangement would be removed several times from the foreign organisation that it is dealing with. However, despite all this, it would still have been possible for officers in the Income Tax Department to ask such entities to disclose their real identities. The system provides officers with the power to explore and gather material facts. Circular 789 of 2000 issued by the CBDT closed this route of inquiry open to Indian I.T. officials.

I felt that the DTAC violated our laws. I also felt that the DTAC resulted in undesirable consequences because foreign funds of all types and taints were coming in and going out at will. And, I also felt that while common Indians are suffering, it was unfair to let this happen.

I am speaking to you from a place where poverty is seen and felt everywhere. In a country where poverty is so rampant these things should not be allowed to happen.

There is this generally held belief that the taxation department is amenable to pressures from the wealthy to avoid paying taxes. Interestingly, in this case, it was the CBDT that issued the first circular. Can you tell us how a wing of the government appeared to act with a degree of autonomy rarely seen in these matters?

In 1999-2000, some very bright officers investigated the manner in which money from Mauritius entered India through Foreign Institutional Investors (FII). The thinking in the department was that avoidance of double taxation was wrong, contrary to law and contrary to the public interest. But then the political executive, under the persuasion of lobbyists, all along held a different view. It is important to recall that officers in the I.T. Department had made a reference to the Mauritius route in 1994. At that time too, the political executive suppressed an investigation into the Mauritius route. At that time too, a circular was issued, virtually paraphrasing the provisions of the DTAC, without any meaning. Basically, it instructed the officers not to proceed against entities investing through the Mauritius route. Thus, the loot continued.

But these officials investigated 24 cases of investments made through the Mauritius route. These 24 cases were in danger of lapsing before the end of the financial year ending March 2000. The officers handling these cases were forced to delay their investigations because they were obviously under pressure. After this date the officers would have been barred from investigating these cases. All the cases had the common modus operandi and common factual stratum, on which the Department passed orders. I know that the officers came under heavy pressure when they dealt with these cases but they withstood the pressure. The lobbyists did not have the time to get directives issued from the very top in time to stop these orders. There was a lot of hue and cry when they passed orders. There were claims that the stock markets would react unfavourably if FIIs were affected. It was said that the FIIs would withdraw money from India and that the country would go down the gutter. A fear psychosis was created. The FIIs moved heaven and earth to get Circular 789 issued in April 2000. With the benefit of my long experience I can say with some degree of certainty that the circular was surely issued under pressure from the powers that be. What kind of pressure this was is now public knowledge.

There have also been allegations that the then Finance Minister's daughter-in-law was working with a prominent FII... .

It is the political executive that I hold responsible. The system of abuse that has been put in place as a result of the Indo-Mauritius DTAC continued under various governments, whether led by the Congress or the BJP. I will not blame this or that government. Since 1980-81, and particularly since 1983-84, the current account deficit increased steadily to alarming levels. Dr. Manmohan Singh, then Governor of the Reserve Bank of India (RBI), endorsed the NRI portfolio investment scheme. My understanding is that the terms of the Indo-Mauritius DTAC were, in all probability, devised for the benefit of those Indians who wanted to use Mauritius as a route for investing in India their tainted wealth amassed outside the country. A third-country resident was unlikely to invest in India through Mauritius at that time. But when the economy opened up, this spate of investments by third-country residents started.

I have also been interested in the process of globalisation as it has unfolded. The issue related to the abuse of the Mauritius route by FIIs has close parallels to the way in which India acceded to the final agreement in the Uruguay Round that resulted in the formation of the World Trade Organisation (WTO). There are some very interesting aspects of globalisation, which have a bearing on national sovereignty. For instance, the Encyclopaedia Britannica (2001 edition) points out that there is a complete mismatch between the political structure of the nation state and the economic architecture that characterises the global economy. This parallels with the way the British colonised India. You may recall how Robert Clive, representing the East India Company, dealt with the nawabs. He was content to let the nawab or the Mughal emperor continue as the legal sovereign. Instead, he was more interested in acquiring control of the economy and economic management. The forces driving globalisation are able to get control of the economies of the world, but at the same time they do not get into a situation in which they are politically responsible to people in these countries.

I feel that the executive has entered into agreements such as the DTAC, without parliamentary approval or even a semblance of a discussion, and without the approval of the people at large. If you notice, this is exactly the way the Indian government signed the Marrakesh agreement, which resulted in the formation of the WTO, without the approval of the Indian people and their Parliament. The executive placed the Indian people on a journey whose destination they have no idea of.

The Supreme Court ruling seems to uphold the government's view that its sovereign right to frame tax policy is unquestionable. It also upholds the right of entities to indulge in treaty shopping. What, in your opinion are the key elements of the ruling?

Tax treaties also have to be within the statutes. In the United States a tax treaty is legislated after the approval of the Senate. In the United Kingdom a tax treaty has to be approved by the House of Commons, which has exclusive jurisdiction over revenue matters. In most other European countries every treaty, including a tax treaty, is enacted. Unfortunately, in India a tax treaty is never brought before Parliament, not even after it is concluded. It is not even placed before Parliament. This means that Parliament has no control over a tax treaty.

According to Black's Law Dictionary, double taxation means the imposition of comparable taxes in two or more states on the same taxpayer for the same subject matter or identical goods. On close analysis of the issues relating to DTACs, it comes down to two things. First, the imposition of tax must be comparable in the concerned countries. Secondly, the imposition of the tax must be on the same taxpayer. Here, the question is this: if a taxpayer is exempted from paying tax in Mauritius, and is also exempted by the provisions of the Indo-Mauritius treaty from paying tax in India, then the net result is that the entity is not paying any tax at all. And, it is important to remember that the tax accrues from the entity's economic activity in India. A serious anomaly results because of the Indo-Mauritius DTAC. Within the territory of India there are now two sets of persons. There are common Indians like you and me who have to pay tax on incomes they earn within the country. But there is another set of non-residents who can masquerade in various ways and not pay any taxes. If this is the law, so be it. But if this is the law, does it conform to Article 14 of the Constitution, which guarantees the right to equality for all Indians? This is the unfairness of the situation.

The Indian executive is a creature of the Constitution and we have to see whether this creature is entitled to its powers.

I quote from Oppenheim's International Law: "It is well established as a rule of customary international law that the validity of treaties may be open to question if it has been concluded in violation of constitutional laws of one of the states party to it since the state organs and representatives must have exceeded their powers in concluding such a treaty."

The term "treaty shopping" is an oxymoron. Treaty and shopping are incompatible. A treaty is an agreement founded on good faith, and shopping is a commercial matter. Now, good faith cannot be traded like wares across the counter. How can there be a shopping of treaty benefits?

How can this situation be rectified?

I think Parliament has a very important role to play now. I see some positive aspects in the Supreme Court judgment. The court has remarked that it was for Parliament to take the initiative to plug the loopholes. I do not think the Judges approve treaty shopping, nor do they appreciate the way the Indo-Mauritius treaty has been abused. Who is going to examine the wisdom of the executive having evolved such a treaty? That is Parliament's job. The executive will surely not do it because it will benefit from it. Every executive in the world wants power and more power.