The tax office has stumbled on a new can of worms.

About ten days ago, the investigation wing of the income-tax department slapped notices on at least five persons in Mumbai, asking them to disclose details of their offshore companies and financial structures in four tax havens — Jersey, Guernsey, Isle of Man and British Virgin Islands.

The notices were served under Section 131of the Income-Tax Act which relates to collection of evidence on undisclosed earnings.

The action has stunned the persons concerned and their financial advisers, who are trying to figure out how tax sleuths got the information. Unlike the Panama Papers or HSBC Geneva accounts, there has been no report till now of data leaks or anonymous hackers infiltrating servers of law firms, banks or other service providers in these tax havens. And even though India has entered into information-sharing pacts with these jurisdictions, the I-T department can obtain information from the tax havens only if it makes specific queries about an individual who is suspected to have violated tax laws in India.

“This is no fishing expedition. All the five people indeed have companies and trust structures in these places,” a person familiar with the development toldET.

All five are exporters
“But so far, none of them (the five people concerned) has faced tax surveys, raids or investigation-…The I-T department has somehow got the information but we don’t know the source. This has caused panic among many who did not come clean under last year’s black money scheme. Since the information is not based on leaked data, the accused cannot defend himself on the grounds that the information is stolen and therefore not tenable in a court of law,” the person told ET.

Once a person responds to the department’s notice, he would be summoned to the tax office where his statement would be recorded on oath.

“All the five individuals who received notices are exporters of commodities and manufactured goods. The money parked abroad is typically shown as commission income that is supposed to have been paid to foreign middlemen who assist in bagging export orders. However, in most cases the middlemen are just front companies of exporters. It’s a ploy to escape tax by parking some funds abroad,” said a senior lawyer who has advised the department in similar violations of tax and foreign currency rules.

Income tax department slams notice on five Mumbai-based exporters over offshore accounts

While the recipients of the recent tax notices had disclosed some of their overseas bank accounts and assets acquired legitimately (under Reserve Bank of India’s liberalised remittance scheme) in their tax returns, none of them had revealed their holdings in the four tax havens mentioned in the department’s letters.

No mention
Significantly, in the offshore companies set up in Jersey, Guernsey, Isle of Man and British Virgin Islands, the names of these five individuals do not even appear as shareholders of the firms.

“The shares are held by nominees who had entered into agreements with these persons. The nominees act as fronts of these ultimate beneficial owners, or UBOs, as they call them. These details are only available with their tax haven service providers. Even banks where the companies have accounts may not be aware of UBOs,” said a senior tax practitioner.

Among many wealthy Indians and non-resident Indians, destinations such as Jersey and Guernsey have been preferred tax havens for decades due to their secrecy, sophisticated service providers, expertise in handling discretionary trusts, tax benefit in purchase of UK properties and close association with banks and law firms in London.

“Also, Indians travelling to London could keep visits to these islands a secret as there are no separate records of the visits in their passports. It’s like a foreigner landing in Delhi and travelling to Bengaluru,” said a lawyer.