The American Embassy School (AES) scam is just about to turn much bigger – and messier.

India is on the verge of gaining some leverage in the Devyani Khobragade case with the unearthing of what looks like a gigantic multi-year tax evasion scam by the American Embassy School here. Even as the US has declined to drop charges against Khobragade on the ground that it does not mess around with domestic law, India now can pressure the Americans to do so, given the growing dimensions of the tax evasion.

The Khobragade visa fraud case is now counterbalanced by what seems to be an American tax fraud in India that either went unnoticed or was ignored in the general need to defer to Uncle Sam in the past. In fact, there is some evidence—quoted in a New York Times story—that the spouses of American diplomats may have been encouraged to lie about their status to avoid having to get a separate work visa in India. Just as Devyani’s maid may have lied about her wages, US diplomats’ spouses may also have misrepresented their status.

The Americans who threw the rule book at Khobragade and preached visa ethics are now finding themselves on the wrong side of the law here. Washington needs to be worried, very worried, on two counts.

First, credible sources told this writer that the American Embassy School (AES) has been violating a number of Indian laws and fraudulently evading income tax since 1972. The cumulative tax evaded thus far and the penalties would easily run into scores of crores, if not more.

The American diplomats in India have also been found to be indulging in an institutionalised mechanism of visa and tax frauds for decades. Worse, unlike the Devyani incident, which was a one-off case, the AES scam has been routinely perpetrated at the behest of top officials of the US embassy in New Delhi. It is not clear if this was done with an overt or covert encouragement from the US State Department.

The diplomats who are appointed to man US embassy and Consulates in India are routinely encouraged to fill in their visa forms with false information.

Two, the headache for the Americans has increased further with The NYT publishing a damning report on the wrong-doings of AES, as predicted by this writer in his yesterday’s report.

The NYT report entitled School in India Ensnared in U.S. Diplomatic Spat hauls the Americans over coals on two specific counts.

Both these disclosures are damning. However, on the second disclosure the NYT has come up only with an incomplete fact. Here is the complete picture as far as this point is concerned.

The NYT report quoted Indian officials as saying that at least 16 teachers in Delhi were working illegally, and that smaller American schools in Mumbai and Chennai probably had several more.

These 16 teachers are those American diplomatic staff members who came to India with their spouses, falsifying their spouses’ personal details in their visa applications. Their perfidy does not stop here.

The 16 American teachers in question are the spouses of American diplomats who enjoy tax exemption while the spouses are not entitled to tax exemption. The American diplomats (who enjoy tax exemption) have given their own salary account number for transmitting salaries of their spouses. Thus, two salaries and one account.

This has all the looks of a scam. The Americans have been wrongly claiming tax benefits for those who are not entitled to these privileges.

The AES is a money churner. Its annual turnover is a whopping Rs 120 crore. Admittedly, a large portion of this income is above-board as a large number of US diplomats enjoy a tax-free regime. But then the number of tax-evaders is not small either; nor is the total tax evaded amount.

Now the question is: what next? What will the government of India do? Will the Indian tiger roar at the American eagle or will it just behave like a circus tiger and wag its tail to the American ring master?

This writer understands that nothing of this sort is going to happen. The Americans are not going to walk away from this without paying all outstanding taxes with penalties.

But this should not be taken for granted. The government must be kept under a tight leash and two things must be ensured: (i) the entire evaded tax money is realised from the US government, along with penal interest; (ii) an institutionalised system is put in place removing scope for any financial wrong doing by American or any foreign diplomats in India.

If this happens, in retrospect the Devyani Khobragade incident would be seen as a good thing which cleansed the proverbial Augustan stables.

The writer is a Firstpost columnist and a strategic analyst who tweets @Kishkindha.