1. Black money law is no magic

Black money law is no magic

The proposed law and the one-time amnesty are unlikely to make any significant dent on the black money stashed abroad

By: | Published: March 19, 2015 3:03 AM

In his Budget speech, the FM reiterated the government’s commitment for bringing back the wealth stashed abroad by Indians illegally. He told Parliament there are certain limitations in existing laws which the government proposes to address by enacting a new law on black money to specifically deal with funds held abroad illegally. The key features were stated as:

* Undisclosed foreign incomes will be taxable at the highest rate of 30% and the offenders would be punished by a penalty of 300% of tax evaded and rigorous imprisonment of up to 10 years, which shall not be compounded. Abettors of such offences, including financial intermediaries like banks, will also be punishable with imprisonment.
* Non-filing of return of income by persons having foreign incomes or inadequate disclosure of such foreign incomes/assets will be punishable with rigorous imprisonment up to seven years. Date when a foreign bank account was first opened would be required to be declared in the return of income.
* Beneficial owners of foreign assets will be mandatorily required to file returns of income, even if there is no taxable income.
* Concealment of income in relation to a foreign asset will be made a ‘predicate offence’ under the Prevention of Money-laundering Act (PMLA) so as to enable confiscation of such unaccounted assets held abroad.
* PMLA and Foreign Exchange Management Act (FEMA) will be amended so that where undisclosed assets are held by a person abroad that cannot be attached, assets of equivalent value held by such person in India would be confiscated.

On surface, this appears to be a fairly stringent plan of action. The effectiveness of any proposed law needs to be examined with reference to its stated objectives. In this case, the objective is fairly stated by the FM—bringing back funds held abroad by Indians in contravention of relevant Indian laws. One would think that, for this to happen, there would be some indication of the size of such funds. However, the government is still silent on this. Earlier, the finance ministry accepting the recommendation of the Standing Committee of Parliament on Finance had, in 2010, tasked three government think tanks, including NIPFP, to carry out estimates of unaccounted incomes in India and abroad, and to report the causes of generation/holding of black money outside India and suggest remedial actions. Though the reports were submitted over a year ago, these are yet to be placed before Parliament or in public domain.

Be that as it may, there is enough credible research in public domain to support the view that the scale of black money in India has attained gargantuan dimensions; that a large part of it is held abroad in contravention of Indian laws; and that the proportion of black money to GDP has not gone down in post-liberalisation phase of drastic reduction of tax rates and dismantling of the so-called licence-permit raj, but has possibly gone up. There are good reasons to suggest that policies to encourage foreign investments in India have often been misused by certain sections for routing their unaccounted foreign funds to and from India. There is little dispute that corruption has spread its tentacles far and wide, and that corruption and black money tend to feed on each other. Thus, for any meaningful results, the hydra-headed monster of black money has to be attacked simultaneously at multiple fronts—generation, holding/conversion or laundering, detection and recovery/deterrence.

The features of the proposed black money law show that it is not directed towards removing even the known major causes of generation of black money. This law is not directed towards curbing the ease of its movement across borders or its utilisation for ostentatious display of money power, etc. The FM appears to be focusing on the recovery/deterrence aspect of the problem by trying to force resident Indians to disclose their undisclosed foreign assets/incomes under the pain of tougher punishments. The question is, how tough these provisions are compared to the existing income law, and will these persuade the offenders to disclose their undisclosed foreign funds when existing laws failed to do so?

The Income-Tax Act already requires Indian tax residents to disclose their global incomes—Indian income as well as foreign income—and pay due tax on it. The rate of tax is the same for both categories of incomes, i.e. 30% if the ‘total income’ exceeds R10 lakh. The requirement to mandatorily disclose any foreign bank accounts and assets was specially added to the returns of income for resident taxpayers last year.

Concealment of taxable income, including any foreign income, is punishable with penalties of up to 300% of tax evaded and rigorous imprisonment of up to seven years if the tax evaded exceeds R25,000. Again, abetment of these offences is punishable with rigorous imprisonment of up to seven years. Compounding of offence under the income-tax law cannot be claimed by the offenders as a matter of right.

These provisions have been on the statute book since 1975 and have only been tightened over the years, but as yet no case of any tax evader having ever been sentenced to seven years has been reported in any of the numerous income tax law reports published every month. This, despite of the hundreds of searches that are carried out every year. Considering the level of tax evasion and the extent of black money in the economy, it can be safely inferred that these provisions have not deterred the tax evaders to any significant extent. The proposed law is not going to be tougher than the existing provisions of Income-Tax Act in this regard except for raising maximum punishment from seven to 10 years. Thus, it is hardly likely that raising the maximum punishment and making the offence non-compoundable will do the trick. In any event, these changes do not require a new law but only an amendment to the Income-Tax Act.

Two other important changes in the proposed law are (1) concealment of foreign incomes will be made a ‘predicate offence’ under PMLA, and (2) FEMA will be amended to permit attachment of Indian assets of equivalent value if the unaccounted foreign assets of a person cannot be attached. The first will enable confiscation of unaccounted foreign assets and the second of Indian assets of equivalent value. But obviously either of these actions will be possible only if information about such foreign assets is available with the authorities, and the evidence is such as can stand the scrutiny of a criminal trial—a huge prerequisite. The requirement of producing sufficient evidence in expropriatory/criminal proceedings is heavy and onerous on the enforcement agencies while the sources of such evidence remain paltry, particularly in cases of foreign assets, the evidence of which is outside India. Their past record in successfully confiscating illegally held assets, whether under the erstwhile SAFEMFOPA or the current PMLA, is anything but reassuring—whether as regards the number/value of such assets or the deterrence value of such actions. These changes need amendment to PMLA and FEMA, not a new law. Besides, such a law cannot be given retrospective effect.

Incidentally, the Income-Tax Act confers wide powers to attach Indian assets of a person against his outstanding demands of tax, interest, penalty, etc, whether these have been raised qua his Indian incomes or foreign incomes, and to recover these dues from the same. With tax rate of 30% and penalties of 300% of tax, the total of tax, interest and penalties exceed the evaded income itself. So, the proposed law is unlikely to provide new armoury to the enforcement authorities.

For successful recovery or deterrence effect, the availability of reliable information of foreign assets and evidence that can stand test of judicial scrutiny will remain critical, whether in implementing the existing laws or the proposed new law. If the information remains unavailable or the supporting evidence is weak even to stand the level of satisfaction in civil proceedings like the income-tax proceedings, it can hardly satisfy the relatively higher standard of proof required for conviction in criminal proceedings. The proposed law is not going to open any new doors for getting such information or evidence. For that, the authorities will have to fall back on the DTAAs and the Tax Information Exchange Agreements (TIEAs). Although now there is greater willingness on the part of many jurisdictions to exchange information under these agreements, the fact remains that while the requirement for exchange of information of a general nature applies prospectively, the rule against fishing and roving enquiries remains applicable for the past years. Information relating to past years can be shared only if specific names and identities of the offenders are provided by the Indian authorities to their counterparts in the concerned jurisdictions. Thus, it does not seem that the existing road blocks in this respect would get removed by the proposed law.

Although the FM made no mention of it, senior finance ministry officials in their post-Budget interactions with the media stated that since such a tough legislation is on the anvil, a one-time short-term window will be provided to the offenders to come clean by paying due tax, interest and penalty. The details, including rate of penalty, were not mentioned but they were at pains to stress that it will not be an amnesty or disclosure scheme; the relief will be only from prosecution. Though the authorities are understandably wary of calling it an amnesty, yet if immunity from prosecution (whether under income-tax law or any other laws) is promised, it becomes an amnesty, no matter what name is given to it.

It appears that the so-called one-time window is a key element of government strategy. The main argument given is that it is necessary to provide an opportunity to the offenders to come clean before a tough law comes into force. Two other arguments often cited in the past were (1) that with several TIEAs having been entered into, information will start flowing in from tax havens, and (2) that the revenue gains from such a measure will be immediate compared with the lengthy and uncertain enforcement processes. As discussed earlier in practical terms, the new law is unlikely to be any tougher than the existing ones. Besides, India has become a member of the Financial Action Task Force (FATF) after fulfilling tough conditions, and FATF strongly deprecates amnesties as these facilitate money laundering and terrorist funding.

India has a long history of disclosure schemes. Staring from the Disclosure Scheme 1951 to Voluntary Disclosure of Income Scheme (VDIS) 1997, there have been more than 12 such schemes, ranging from the ones offering highly concessional rates to expropriatory demonetisation schemes to virtual alternate currencies of bearer bonds, gold bonds, Vikas Patras, etc. Some were designed for niche groups such as those hoarding gold or foreign exchange, NRIs, etc. These appealed to sentiments as diverse as patriotism, national defence, nation-building, concerns for fellow citizens, fear of future strict enforcement and so on. The last of these, VDIS-1997, attracted 4,75,477 declarations aggregating R33,697 crore and realised tax of R9,729 crore. Though described as the ‘very last opportunity’ and the most successful, it could bring out black money of no more than 0.9% of GDP when the most conservative estimates ranged upwards of 30% of GDP. Most declarations under it were of cash and jewellery. A mere 0.43% declarations were for amounts above R1 crore. The scheme was misused for making declarations in benami names (source: CAG report). The Supreme Court, while dismissing a PIL against it, noted the government’s commitment that, in the future, it would not resort lightly to schemes favouring dishonest taxpayers.

Published studies regarding the effectiveness of various amnesties bring out that tax offenders respond to amnesty if it offers them a highly concessional tax rate compared to when they made the decision to evade; or if they expect higher returns by bringing out their black money; or if there is a greater present chance of being detected. The one-time window being planned does not offer concessional tax rates. The much abused routes for bringing in unaccounted funds in various guises to avail benefits of Indian growth story remain undisturbed. Thus, such a measure can succeed only if the offenders perceive a greater present chance of being detected. There is little possibility of this in the absence of the relevant information with the authorities.

The proposed law and the one-time amnesty window being planned under it are unlikely to make any significant dent on the assets held abroad illegally by Indians.

The author is former member, Central Board of Direct Taxes

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