Decoding The Panama Papers: A Revelation That Shook India

The Panama Papers have hit the nation at a time where the government too is probing into money laundering activities.

By Vipul Maheshwari


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The current revelation that has been brought to notice with the black money networking and how Indians top the lists leaked out from Mossack Fonseca is not simply startling but also comes as an alarming eye-opener.

The Panama Papers have hit the nation at a time where the government too is probing into money laundering activities.

And if that was not enough, there has been an investigation team that is concluding upon a report on black money headed by the former Supreme Court Judge, M B Shah. The names that pop up with the entire Panama Paper trail has endless celebrities, eminent politicians, corporate moguls and distinguished world leaders.

The whistleblower who has gone ahead to open the chits of tax evaders includes close to 500 Indian citizens who have offshore entities in their names and function through various tax havens.

Past Manipulativeness:

When the question arises what was the law of our nation doing towards this money evasion, then comes to light the law that was introduced called Liberalised Remmittance Scheme under the Foreign Exchange Management Act.

It came about in the year 2004 where resident Indians got the permit to convert $25,000 annually in various forms to take abroad. So this included, education abroad, shares, donations, gifts, property and much more. This limit since then has been increased by the RBI and now comes to approximately $250,000 a year where an individual can convert the money and invest it abroad. In the year 2004, RBI had specified where all the money can be used and under those specifications, buying shares was included.

Though until 2013, it never said that a resident Indian can go ahead and set up companies abroad. There was great confusion since the market believed that if shares can be bought then even companies can be initiated.

To lessen all the hassles, RBI went ahead in the year 2010 and put it in black and white that resident individuals can buy shares but are prohibited from establishing companies abroad.

Now to counter a rule like that, many individuals found a loophole stating that they would not set up a company of their own, however, they would acquire one which was not mentioned under the prohibited investment stated by the RBI.

Valid point to be thought of, Mossack Fonseca, a leading law firm based out of Panama that has made its presence globally (has over 600 employees working in close to 42 countries where they operate in tax havens like Switzerland, Cyprus, the British Virgin Islands and in the British crown dependencies like Guernsey, Jersey and the Isle of Man) is one of the biggest incorporators who churn out shell companies by the minutes, get them registered and set base for an acquisition where investors also buy the shares of the company.

Noticing such a smart way to manipulate the law, RBI in the year 2013 in the month of August went ahead and reformed the law where it mentioned that, resident Indians can directly invest in JVs and overseas subsidiaries through Overseas Direct Investment (ODI) path.

So as per the legal position, one could either set up a 100 per cent subsidiary or have a joint venture subsidiary, however, this was only passed in 2013 and those who set up an establishment overseas prior to the revised law had technically violated the law and will fall under the radar.

Outcome Of The Deviousness:

There are many who set up companies, even prior to 2004 which is a bigger felony. So what was termed once as Tax Planning and building multiple layers of secrecy is nothing different from Tax Evading, Money Laundering, and mere Tax Avoidance. Panama Papers has gone ahead and burst this bubble of secrecy that had been kept under lock and key and managed to turn the tables around for the ones who had been avoiding tax and liberally acquiring black money.

What comes out of the investigation might take a different turn, however, it is interesting to know what went behind the whole scenario and how it lead to the investments made abroad. The revelations to add to the chapter would be more, however, the government, RBI, tax department and investigation teams are the ones to bring in the change that has been shrugged for almost 10-15 years now.

Vipul Maheshwari

Managing Partner, Maheshwari and Co. Law firm.

Vipul Maheshwari has been practicing since 1992 in various areas of law with specialization in Corporate Laws, Joint Ventures & Strategic Alliance, Capital Markets, Merger & Acquisitions and Corporate Restructuring. He has been advising various foreign companies including the largest Company of architects, designers and engineers in Europe having its offices at UK, Ireland, Netherlands and UAE, in establishing their business into India.

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