The Bridge Chronicle talked to Sonam Chandwani, a finance lawyer at KS Legal and Associates to clear these queries and some misconceptions.
What are offshore accounts?
Off-shore accounts are bank accounts in the banks of a foreign jurisdiction in order to avail their banking services. An Offshore Banking account is useful for any Offshore Investments and/or placing overseas deposits. It can also be undertaken by individuals who are no longer residing in their home country but wish to continue banking there.
Why do the rich set up off-shore accounts?
Taxation optimization is the top priority of most companies going offshore. High tax burden makes people hesitate to open a bank account in their home country. By contrast, opening an offshore bank account in tax havens allows account holders to be entitled to a favorable tax rate – either a lower tax rate or even no tax rate at all. Another reason people or businesses hold money out of their home countries is to protect their assets. In many countries, the banking system has fairly feeble and unsound protection to account holders’ wealth and assets (In Global Finance's 29th annual ranking of the World’s Top 50 Safest Banks, no Indian banks are mentioned). Fortunately, an offshore bank account can offer safety to assets, especially when foreign account is opened highly transparent and regulated jurisdiction with a strong privacy law such as Swiss offshore banks.
Furthermore, offshore accounts also provide security and privacy to rich people. It provides security from the changing economic climate of their own country. Many offshore banking jurisdictions have enacted serval laws of strict corporate and banking confidentiality. These highly emphasize anonymity for account holders, allowing accounts’ information to be kept safe and undisclosed.
Is it a misconception that offshore accounts are illegal? If it is not, when does it become an illegal activity?
Offshore accounts are 100 percent legal in India. The Special Economic Zone Act authorises the opening of an offshore banking unit which shall be governed by the RBI rules.
Reserve Bank of India (RBI) permits Indians to open and maintain a bank account overseas. Under the Liberalized Remittance Scheme of the RBI, sending money to an account overseas is a legitimate purpose. RBI revised the LRS purpose code S0023 to ‘Opening of foreign currency account abroad with a bank’ in Feb 2016. Foreign Exchange Management Act (FEMA) also authorises the same.
Offshore accounts become an illegal activity when they are made for the purpose of evading taxes in one’s home country. If the account in a foreign bank has income undisclosed to income tax authorities or has funds from illegal sources, the account can be declared illegal, under the FEMA.
If it is legal, why is there an investigation going on?
Yes, offshore accounts are legal. The current investigation is going on because of suspicion of evasion of taxes by stashing money in offshore accounts. Tax havens are characterised by negligible or zero tax rates and a system of secrecy that conceals a firm’s beneficial owner, or the natural person behind a legal or tax arrangement. It’s the secrecy that causes problems for other countries. Evasion of taxes is illegal. As per Section 271(C) of the Income Tax Act of 1961, in case of hiding or understating your income, the penalty can be anywhere between 10% and 200% of the amount of tax that was due but not paid.
As someone well-versed in finance and legal matters, I'm well-positioned to delve into the intricacies of offshore accounts, taxation, and the legal landscape surrounding them. The discussion with Sonam Chandwani, a finance lawyer at KS Legal and Associates, touched upon various key points regarding offshore accounts and their implications.
Offshore accounts refer to bank accounts held in foreign jurisdictions primarily for utilizing banking services, investing offshore, or depositing funds overseas. They serve various purposes, notably tax optimization, asset protection, and providing security and privacy, especially for high-net-worth individuals.
The primary reason behind setting up offshore accounts is taxation optimization. Countries with high tax burdens often lead individuals or businesses to seek better tax rates or even tax exemptions in offshore jurisdictions. Additionally, these accounts offer asset protection, especially in regions where banking systems lack robust security for account holders' wealth.
Moreover, offshore accounts offer security and privacy by safeguarding against economic fluctuations in one's home country. Jurisdictions with strong privacy laws, like Swiss offshore banks, emphasize account holder anonymity, ensuring the safety and confidentiality of their information.
Contrary to misconceptions, offshore accounts are legal, subject to adherence to specific regulations. In India, the Special Economic Zone Act governs offshore banking units under RBI rules. The Reserve Bank of India permits Indians to open and maintain overseas bank accounts through the Liberalized Remittance Scheme, provided the purpose aligns with the scheme's guidelines.
However, these accounts become illegal if used for tax evasion or if the funds in the foreign bank accounts stem from undisclosed income or illegal sources. Under FEMA, undisclosed foreign income or illicitly sourced funds render the account illegal.
The ongoing investigations concerning offshore accounts revolve around suspicions of tax evasion through the concealment of money in these accounts. Tax havens, known for their minimal tax rates and secretive systems, often raise concerns for other countries due to the opacity they provide. Tax evasion is illegal, and the Income Tax Act of 1961 stipulates penalties ranging from 10% to 200% of the unpaid tax amount for hiding or understating income.
The nuanced understanding of offshore accounts, their legality, and the implications surrounding them is crucial to navigate the complexities of international finance and legal frameworks.
