Supreme Court breather for HSBC Geneva account holders

MUMBAI: Swiss bank account holders who have been quietly celebrating the exit of P Chidambaram now have another reason to rejoice. Almost three-fourths of the 600 or so named in the list of clients of HSBC Geneva are beneficiaries of ” discretionary trusts”.

These individuals are confident that a Supreme Court ruling this week on offshore trusts will get the taxman off their back. Tax officials have been pursuing offshore accounts held by Indians, especially those on the HSBC list that originated with an employee of the bank.

The apex court has ruled that Indian resident beneficiaries shall not be taxed on the income of an offshore discretionary trust as long as the trustees do not distribute income to the beneficiaries.

Contrary to popular perception, very few in the HSBC list have direct numbered accounts. Most of them are members of trusts that have accounts with HSBC Geneva. A discretionary trust is one that gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees the discretionary power to pay the person what they deem fit.

“The HSBC accounts were used to hold undisclosed wealth parked abroad. The beneficiaries were careful enough not to receive any money in India from the trusts as that would have come via banking channels and would have been easily traced,” a senior tax practitioner who advises several offshore account holders told ET.

“Instead, the arrangement with the trustees was that some trust earnings were paid to beneficiaries when the latter went abroad on business or holiday trip. Also, in many cases, there were instructions to the trustees to release funds for education expenses for family members enrolled in foreign universities.”

The SC case relates to tax claims made on beneficiaries of two private trusts set up in the early 1960s in the UK by Maharaja Vikramsinhji, the former ruler of Gondal, a princely state in the Bombay Presidency. The SC ruling not only ends the dispute that has been going on for years between the tax department and members of the Gondal royal family but has come at a time when the HSBC account holders were trying to determine how the next government would pursue the matter.

A senior tax department official said beneficiaries may not be able to escape the tax net if there is evidence of spending during overseas visits. “The trustees will have records of payment to the beneficiaries,” said the person. In fact, the Delhi income-tax office has asked some HSBC Geneva account holders to give an undertaking that they have not spent money received from trusts or trustees on foreign trips.

However, it could be extremely difficult for the Indian tax office — having built their case so far on stolen data and yet to receive any clinching evidence from the Swiss authorities -— to access such book-keeping records of offshore trusts in tax havens. Pointing out that “the income has been retained and not disbursed to the beneficiaries”, the SC said merely because the trust’s settler, the former Maharaja, and after his death, his son, did not exercise their power to appoint “discretion exercisers”, the character of the subject trusts don’t get altered. Thus the UK trusts, according to the court, continued to be “discretionary” trusts for the assessment years.

“The HSBC case is unlikely to be among the top priorities for the new government. Resident Indians with undisclosed overseas accounts or investments in foreign shares before RBI’s liberalised remittance scheme was announced possibly hoping the government will consider an amnesty or a quasi-amnesty scheme to bring back money from tax havens,” said a chartered accountant with a leading firm.