Black Money Law: Regulatory overkill

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Published: August 29, 2015 2:31 AM

Provisions of the Act should neither result in regulatory over-control nor should lead to bureaucratic witch-hunt

Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.
—Ronald Reagan

The Indian government recently enacted the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The attempt of this Act is to bring back undisclosed offshore income and assets of residents that had escaped being taxed in India. The applicability is to persons who are residents of India (other than not ordinarily residents and non-residents), and contains stringent provisions in the form of levy of tax and penalties along with initiation of prosecution, which can lead to punishment for a time frame ranging between 3-10 years.

There is no doubt that black money has been a serious issue facing Indian lawmakers for a number of years now. However, the Act, though enacted with noble intentions, seems have gone a step too far. The Act contains provisions pertaining to disclosure of assets outside India, the applicable tax on such assets, the penalties in relation to non-disclosure, and other aspects for disclosure of assets held outside India. In addition to imposition of tax and penalties on the non-compliant asset holders, the Act also imposes equally stringent punishment in the form of imprisonment and fine, on those persons who are found guilty of abetting or inducing another to wilfully attempt to evade tax or make false statements/declarations in relation to income and assets outside India.

Extending the applicability of the Act to ‘abettor’ may lead to draconian consequences. The provision on abetment under the Act, as it stands today, may cover within its purview professional advisers such as investment banks, accountants, lawyers and other financial consultants. In a normal commercial transaction, it is fair to say that any client would approach a professional adviser for obtaining efficient advice on structuring any transaction—the key component of which is always linked with financial and tax planning—so as to achieve maximum attainable gains for such client.

Indian entrepreneurs are venturing outside the country to tap business opportunities in markets that are witnessing ever-increasing competition not only from traditional western superpowers but also from emerging market corporates from the BRICS nations. So in today’s day and age, it is suffice to say that the provision of ‘abetment’ under the Act could prove to be an unwanted impediment in front of Indian entrepreneurs. Investment in any overseas jurisdiction requires an Indian resident to obtain frequent financial, regulatory, legal and tax advice from advisers located in overseas jurisdictions as well as in India. Due to the provision on ‘abetment’, even such professional advisers would now have legitimate reasons to be concerned as regards any advice provided by them which the tax authorities could deem to be ‘abetment’ under the Act.

In addition to professional advisers, even overseas banks will become uncomfortable because such banks are likely to come under scrutiny under the Act. Due to this reason, overseas banks have now stepped up their due diligence and KYC checks on Indian residents, their tax status and the source of their funds before undertaking any inflow and outflow of funds.

The recent FAQs released by the Central Board of Direct Taxes in relation to various aspects under the Act have also been silent on what amounts to ‘abetment’ under the Act; this has not aided in reducing uncertainty around it. It is expected that another set of FAQs are going to be issued soon and it is hoped that adequate clarity will be rendered on what constitutes ‘abetment’.

Amidst all this, it should be hoped that the provisions of the Act should not result in regulatory over-control and should not lead to bureaucratic witch-hunt that has grappled Indian businesses and capital movement for decades in the past.

(CV Srikant contributed to the article)

The author is partner with J Sagar Associates, Advocates and Solicitors. Views are personal

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