Current Affairs 2022: Pandora Paper Leak Case

By Ankita Rawat

Pandora Papers leaks were recently in news. It was collected by the ICIJ- International Consortium of Investigative Journalists of Washington DC. Read further about the Pandora Paper leak case here.

Pandora Papers are worth 12 million leaked documents that expose tax avoidance, hidden wealth, and also money laundering from some of the world’s powerful and richest people. Almost 600 journalists in 117 countries are inspecting files for months, discovering stories around these documents from 14 companies in overseas tax impose with details of ownership of 29,000 overseas companies and trusts from Vietnam to Singapore and Belize. The data was collected by ICIJ- International Consortium of Investigative Journalists in Washington DC, ICIJ is working along with 140+ media organizations which are the greatest ever global investigation. Overall 100 billionaires including celebrities from countries like the US, Pakistan, Russia, India, Mexico, and the UK used shell companies and incognito bank accounts to buy secret assets and operate secret financial dealings.

As few Indian names have been unleashed in the media who are reportedly associated with Pandora Papers Leak, the Government of India has taken cognizance of the same and for the intention of speedy and coordinated investigation. The Government has brought the Pandora Papers leak cases into the umbrella of MAG- Multi-Agency Group, that constituted under the authority of the chairman, CBDT- Central Board of Direct Taxes, with Directorate of Enforcement, RBI, Foreign Tax, Financial Intelligence Unit India & Tax Research Division of CBDT as their member agencies.

Outcomes of the Pandora Papers leak Investigation

Pandora's papers disclose how rich people establish complex multi-level trust structures for estate planning but are portrayed by air-tight secrecy laws. The papers exhibit dual objectives of establishing the trusts, including hiding actual identities to make it difficult for tax authorities to contact them and protecting their investments from law enforcers and creditors such as real estate, cash, and shareholdings.

What are trusts?

Trust is an agreement where the trustee keeps assets on behalf of organizations/ individuals who are benefitted from it. Usually, large business families use this to secure their assets. The trust includes a settlor who creates or establish trust, a trustee who keep the assets for people as termed by the settlor, and beneficiaries, who avails the benefits of the assets. The Indian Trusts Act, 1882 dictates the establishment of trusts in India and acknowledges offshore trusts as well. Businessmen use trusts for genuine estate planning and fix terms for beneficiaries to draw income distributed by the trustee or acquire assets after his/her death. But, if trusts are used to avoid taxes, secure wealth from law enforcers, protect it from creditors to whom large amount is unpaid, and sometimes use it for criminal activities are illegal.

Why are offshore trusts set up?

1. Businessmen plan to set up private offshore trusts to avoid themselves from their assets. In this case, the settlor does not own the assets that he settles in the trust & hence protect assets from creditors.

2. The offshore trusts provide immense secrecy to businessmen because of their complex structures. The Indian Income Tax Department is only allowed to request financial investigation agencies or international tax officers in offshore administrations to get to the actual beneficial owners, the whole process takes months for the exchange of information.

3. Usually, the businessmen transfer their assets to trust, so that they can avoid NRI children from being taxed on the income acquired from the trust.

4. Due to fear of estate duty that was abolished during Rajiv Gandhi’s Prime Ministership in 1985 may be reintroduced. Setting up trusts in advance will protect the new generation from paying the inheritance/ death tax, now India does not have a wealth tax.

5. Country like India, having a capital-controlled economy allows people to have a maximum investment of around $250,000 per year. To avoid this, businessmen have changed to NRIs as they can postpone $1 million a year besides their current annual income, outside India. Also, India has high tax rates as compared to offshore jurisdictions.

Loopholes of Indian Taxation-

• After the demolishing of Black Money and the imposition of the Tax Act, 2015 came into existence, the Indian residents have to inform their foreign financial assets and interests but it’s not mandatory for NRIs. 
• The offshore trusts are mostly considered as a resident of India by IT Department for taxation purposes if the trustee is a resident of India.
• If the trustee is an offshore person or NRI, then the tax department set up the trustee is taking directions from Indian resident and hence, the trust might be considered as Indian resident for taxation purposes.

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About the Author

  Ankita Rawat is doing graduation in BA(JMC) from JIMS Vasant Kunj, New Delhi.