Express concerns of tax evasion

Judiciary: The High Court (HC), while studying the case of winding up and distribution of profits of Mega Private Limited based in Phuentsholing, revealed that there are many fictitious companies created to import and export goods without having to pay taxes to the government.

Expressing grave concerns, the HC on December 31, ruled that such existence of fictitious companies was not only deceiving the government through tax evasion but also boosted black market. “Such fraudulent and deceptive practices emerged because of total ignorance and negligence of the concerned authorities and agencies,” the HC’s ruling on four partners, who established Mega Private Ltd., to pay evaded taxes to the government, stated.

The four partners were ordered to pay personal income tax (PIT) on the more than Nu 94M, including Nu 60M dividend the company declared they earned as income.

The existence of fictitious companies were revealed when plaintiff Kunley Wangdi and his three partners and defendants, Namgay Nidup, Tandin Dorji and Ugyen Samdrup, admitted before the court they created a software export unit, which was allowed by the government in 2005.

Both appellant and defendants submitted that although Bhutan was in no position to develop and sell software products to third countries, the government had made it, like many other similar companies in the country, mandatory for Mega Pvt. Ltd. to generate its own hard currency to import crude palm oil from third countries. “Thus the software export unit license was obtained to formalise the process of remitting US Dollar, bought from the general markets abroad into the company’s through foreign currency (FC) account and from where necessary dollar payments were made,” three defendant’s legal counsel, Younten Dorji, said in his rebuttal and closing argument submitted to the appellate court on December 29.

In turn, according to defendants, US dollars brokers in the general markets were paid through demand drafts and the same had been booked as consultancy expenses incurred for the development of software programs.

Younten Dorji submitted that export of fictitious software programs at high sale rates were thus shown in the software unit (that were audited annually by its statutory auditors) only to have wider latitude to remit hard currency in the company’s FC account, which will in turn allow more import of crude palm oil for the company.

Kunley Wangdi, who claimed Nu 438.36M from the total amount of Nu 1.753B generated in the name of vanaspati and software export for being a partner with 25 percent share, said the only expenditure involved in the software export business was the cost of airfreight of a “brown envelop” from Bhutan to Bangkok and Hongkong, containing nothing but the detail of money exchange and commission involved on the transaction.

He claimed he opposed the software business idea.

Kunley Wangdi’s legal counsel, Cheda submitted that there was no actual software development in Bhutan. It was just a mere exchange of currency from Ngultrum to Indian currency and then to US dollars. Mega used to pay the Indian money exchanger and their counterpart in third countries who deposit equal amount in dollar in the foreign account maintained by Mega Pvt. Ltd.

“Late RS Agarwal, owner of Kashi Store in Phuentsholing, was the main person who organised all these dubious dealings of money exchanges,” the legal counsel submitted.

A commission of about 9 percent for such arrangements was charged.

In reality, the defendants’ counsel, said the expenditures booked against software production were actually the sale proceeds of the vanaspati oil production that were spent in purchasing dollars and in paying for its commissions. Both defendants and plaintiff submitted before the court that this merry-go-round show of the fictitious software was carried out by many similar companies, a fact well known to the government.

Kunley Wangdi alleged that after taking over the management of Mega Pvt. Ltd. from him, Namgay Nidup, Tandi Dorji and late RS Agarwal, decided to adopt the same trick of earning false foreign exchange used by Tandin Cables for the import of copper wires and PVC granolas since 2002.

“However, unlike other software licence holders, Mega Pvt. Ltd. management betrayed the trust of bestowed and indulged in all kinds of unethical business by using wrong means for their personal gains depriving the legitimate taxes to the government,” Kunley Wangdi’s counsel said.

The HC’s ruling stated that such fictitious companies violated the Companies Act and Penal Code of Bhutan, which deserve for legal actions and punishment. “Since government had issued licenses to carry out such fictitious companies, it is not just and fair to impose legal sanction against one company, Mega Pvt. Ltd. in this particular case,” the HC’s judgment stated.

The court also questioned the concerned government agencies and its policies for allowing such illegal businesses.

Meanwhile, the defendants submitted that to their knowledge, the company didn’t violate any Company Law for the idea of the fictitious software export was well known and approved by the government. “Since the company like other similar companies were under tax holiday, there was no obligation on the company to pay tax and the government didn’t suffer any loss,” they submitted before the court.

By Rinzin Wangchuk