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What Does The Panama Papers Reveal And How It Effects India?
Before 2004, India had prevented the outflow of foreign exchange and convertibility of the rupee was not allowed. In 2004, Reserve Bank of India created a scheme called Liberalised Remittance Scheme (LRS) where an Indian resident was permitted to take $ 25,000 outside of India. This money could be used for many purposes such as gifting money, children’s education, donations or medical treatment. Over a period of time, the limit was gradually raised to 250,000 $. This means that a resident individual could take upto 250,000 $ legally outside India for any purpose. This included buying of shares, but RBI did not specifically allow resident Indians to set up companies abroad until 2013.
In 2010, the RBI clarified that LRS allows buying shares but specifically prohibited setting up of a companies abroad by individuals. But many individuals sought to take a different view when Chartered Accountants gave an interpretation that acquiring companies is not the same as setting up companies. There are many players in the overseas market like Mossack Fonseca that kept registering and churning out companies. 'Churning' means excessive trading by a broker in a client's account largely to generate commissions. Anybody could buy a company or buy shares. In 2013 August, RBI allowed resident Indians to invest directly in JVs and overseas subsidiaries through the Overseas Direct Investment (ODI) window route, where you could set up a 100% subsidiary or invest in a Joint Venture company.
From a legal aspect, individuals who had to set up companies overseas prior to August 2013 would have legally violated the rules on LRS scheme and FEMA regulations. But people who had incorporated companies even ahead of 2014, which makes it clear outliers. The important question is : When you can’t take money out, how can you set up an entity abroad? In the Panama Papers it was found that people had incorporated companies, bought the companies and had acquired shares over a period of time. The issue with any tax haven is the layers of secrecy and the avenues of the tax saving which is termed as tax planning. Also, a person would not get to know who is the owner. This is where the Panama Papers breaks the secrecy. According to Indian Express, the papers had revealed Bollywood legend Amithabh Bachchan, was appointed director of at least four shipping companies registered in offshore tax havens that was set up 23 years ago. The authorized capital of these companies ranged from just $5,000 to $50,000 but they traded in ships worth millions of dollars. Furthermore, Indian Express also stated that the papers also revealed that Aishwarya Rai Bachchan and her family members were registered in 2005 as directors of Amic Partners Limited. Her status was later changed to share holder before the company was dissolved in 2008. Also, DLF promoters KP Singh acquired a company registered in British Virgin Islands in 2010. His family’s three offshore entities hold almost $10 million.
The relevance of the panama papers could violate foreign exchange management act, prevention of money laundering act, black money and imposition of tax act, prevention of corruption act and income-tax act. Mossack Foseca even hid the names of the real beneficiaries by offering its own executives as shareholders or directors in the off-shore firms. The investigation, apart from its India angle, also contains the names of over 100 political leaders worldwide including Russian president Vladimir Putin, Pakistan Prime Minister Nawaz Sharif and Chinese President Xi Jinping. The leaked data from 1975 to the end of last year have given a new insight of the inside of the offshore world.