The Pandora Papers leak has recently brought to light the involvement of several Indian personalities, shedding light on over 300 Indian names, including 60 prominent figures. The Pandora Papers comprise 11.9 million leaked documents from 14 global corporate service firms that established approximately 29,000 off-the-shelf companies and private trusts.
Understanding the Concept of Trust
A trust is defined as a fiduciary agreement where a third party, known as the trustee, holds assets for individuals or organizations that are set to benefit from it. Under Indian law, specifically The Indian Trusts Act of 1882, trusts are recognized as an obligation of the trustee to utilize and manage assets in the trust for the benefit of the beneficiaries. India also acknowledges offshore trusts.
The Role of Off-The-Shelf Companies
An ‘off-the-shelf’ company, also known as a ready-made company, is a pre-registered limited company that has never traded before. Such a company is prepared for immediate use and can be purchased after paying a certain fee.
Pandora Papers’ Revelations on Trusts and Offshore Companies
The Pandora Papers reveal how trusts are employed in combination with offshore companies, which are set up solely for holding investments and other assets by wealthy business families and individuals. These trusts are established in known tax havens, like Samoa, Belize, Panama, and the British Virgin Islands, offering relative tax advantages due to their air-tight secrecy laws.
Motives Behind Establishing Trusts Overseas
There are multiple reasons for setting up offshore trusts, including the offer of remarkable secrecy because of strict privacy laws. Business people establish these trusts to create a degree of separation from their personal assets, avoid taxes, prepare for a potential reintroduction of estate duty, and overcome capital control in India.
Grey Areas and Contests in Indian Taxation
The Income-Tax Department often contests with offshore trusts in certain grey areas of taxation. After the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, resident Indians have been required to report their foreign financial interests and assets. However, Non-resident Indians (NRIs) are not required to do so, leading to potential conflicts over taxation.
Government’s Measures to Combat Tax Evasion
The Indian government has enacted several laws to tackle tax evasion, including The Fugitive Economic Offenders Act, 2018; The Central Goods and Services Tax Act, 2017; The Benami Transactions (Prohibition) Amendment Act, 2016 and more. Additionally, India actively engages with foreign governments to facilitate and enhance information exchange under Double Taxation Avoidance Agreements (DTAAs), Tax Information Exchange Agreements (TIEAs), and Multilateral Conventions.
Notably, India has also entered an information-sharing agreement with the United States under the Foreign Account Tax Compliance Act, adopting a proactive stance in global efforts to combat tax evasion.