India’s tax systems withstand scrutiny over data confidentiality

Both the US and the global forum working on automatic exchange of information under OECD have endorsed the data safeguards put in place by India
New Delhi: India’s tax systems have withstood international scrutiny over data confidentiality and other safeguards put in place by the government before the revenue authorities start receiving massive volumes of sensitive information about the global operations of multinational entities.

Both the US and the global forum working on automatic exchange of information under the Organisation for Economic Cooperation and Development (OECD) have endorsed the data safeguards put in place by India, a senior income-tax department official said on condition of anonymity.

This should put to rest concerns of companies about protection of the confidential information they provide to Indian tax authorities under the so-called base erosion and profit shifting norms laid down by the OECD last year, this official said.

In this year’s Union budget, India introduced mandatory country-by-country reporting provisions for all companies with a presence in India and consolidated revenue of more than €750 million.

Such entities would have to disclose information about the entire group’s operations—even those of subsidiaries that are based out of India.

This led to fears about data confidentiality since companies will need to make detailed disclosures to the Indian tax authorities.

Base erosion and profit shifting norms were adopted globally last year to prevent multinational corporations from shifting their profits to low-tax jurisdictions to evade taxes.

“Companies are concerned about safeguarding their data. They want to ensure that their information is secure and confidential and should not be misused. The government has been very conscious of the need to have adequate confidentiality and data safeguards. We have been working on this,” said the official cited above.

“We have opened our systems for review by the international community. The US authorities inspected our systems for FATCA (Foreign Account Tax Compliance Act) and found that we have adequate confidentiality safeguards. Thereafter, the global forum working for the automatic exchange of information group also examined the Indian safeguard and policies and found them to be adequate for exchange of information,” he added.

With India privy to a lot of confidential information on account of global automatic exchange of information as well as FATCA, the Central Board of Direct Taxes has put in place a number of safeguards to protect confidential information.

The board has constituted a central information security committee headed by a member of the board and appointed a central chief information security officer. It has also issued guidelines on keeping data secure and sensitized field staff.

“We are not content with this. We are working to make the systems as secure as possible. We are very conscious of the need to keep this data information secure and ensure that it does not fall into the wrong hands,” the official added.

An OECD spokesperson, in an email response, said India had received a rating of “compliant” from the global forum.

The spokesperson explained that the global forum conducts a review in two phases and once the process is completed, one of four compliance ratings are issued: compliant, largely compliant, partially compliant, and not compliant.

India is among a few countries that has received a compliant rating after two reviews and that too across important parameters like confidentiality and rights and safeguards.

There is a need for the government to assure companies that the information they provide to India is secure, given that they need to submit data covering all their global operations, said Sunil Jain, a partner at J. Sagar Associates, a law firm. “The tax department will have to carefully safeguard confidential data about a company’s operations like margins and intellectual property rights,” he said.