Black Money: The Big Debate

If sources close to the Black Money Bill, India’s first and major legislative initiative against unaccounted wealth, are to be believed, BJP’s irrational poll promise of bringing back black money from tax heaven is not a primary trigger behind pushing this law. Mandarins of Revenue Department are abuzz with the chatter that govt has got hold of sensitive information on illegal foreign accounts via global exchange of information. Couples of internal studies and investigations commissioned by last govt are also in its possession.  As Supreme Court is monitoring SIT investigation assertively and a crackdown on foreign accounts may be ordered at any time, govt is forced to set legal house in order with the help of THE UNDISCLOSED FOREIGN INCOME AND ASSETS IMPOSITION OF TAX (UFIAIT) BILL 2015.

This bill has been tabled in Lok Sabha as a money bill, that makes discussion in the Rajya Sabha redundant and can be passed by lower house only after a limited debate. But Hang on! The swiftness to get the bill sail through Parliament is not the only twist in the tale. UFIAIT bill offers an amnesty (bill calls it compliance) window to tax cheaters to escape punitive action. This ‘facility’ clubbed with haste is all set to spice up conspiracy theories, which are always coupled with black money discussions. On top of all, the UFIAIT Bill is likely to strike a new era of tax terrorism as it opens channels for multiple prosecutions against one person on same offence by arming tax authorities with judicial powers as are vested with courts.

The trigger

Corruption and black money attracted huge public attention in 2011 at the time of Anna Hazare’s  movement on Lok Pal Bill.  Public perception was created that a huge amount of ‘Black money’ was stashed abroad in illegal accounts. This furor finally culminated into the presentation of a white paper on ‘Black Money’ in Parliament in May 2012 by then finance minister Pranab Mukharjee. “One of the first measures taken to bring back money kept in illegal accounts abroad was to increase the limitation period in the Income tax Act for detecting black money stashed abroad from 6 to 16 years,” mentions  M C Joshi, former chairman of Central Board of direct taxes and  member of  finance ministry’s White paper drafting committee.

After the new Government took charge, a Special investigation Team (SIT) was formed as per the directions of the Supreme Court to monitor cases of foreign accounts, with a view to bring back black money which was stashed in illegal overseas accounts and also to prosecute persons having illicit accounts abroad. “The SIT gave various suggestions to the Government including making it a criminal offence to keep unaccounted money abroad.”  Joshi pointed out.

The bill

The Bill is described as a comprehensive new law on black money specifically designed to deal with unaccounted foreign wealth. It provides for separate taxation of undisclosed foreign assets or income of a resident Indians. It lays down that such assets will not be taxed under the existing Income Tax Act, but under this new law at the rate of 30%, with penalty of three times the tax, and imprisonment of three to ten years. Abetment of these offences will also be punishable with imprisonment of up to seven years. These offences will not be compounded. The Bill also provides that non-disclosure of foreign incomes/ assets by Indian will henceforth be a predicate offence under the Prevention of Money laundering Act (PMLA). However, assessment procedure and appeals are practically the same as per the provisions of the I.T. Act 1961, confirms Joshi.

Is the black money bill a masterwork of legislative craftsmanship?  S S Khan, former member of CBDT, disagrees and says “The Income Tax Act requires resident Indians to disclose their Indian income as well as foreign income, and pay due tax on it. The requirement to mandatorily disclose any foreign bank accounts and assets etc. 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 three times the tax and rigorous imprisonment of up to seven years if the tax evaded exceeds Rs. 25000/-. Non-filing of returns of income and abetment of these offences is also 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.”

The amnesty

The Bill proposes a limited one-time compliance window for resident Indians having undisclosed foreign income or assets to make a disclosure and pay tax at 30% of fair market value of the foreign asset,  and penalty equal to 100% of tax (instead of 300% of tax). In return they will not be required to pay wealth tax on these assets and they will not be subjected to prosecution under the Income Tax Act, Wealth Tax Act, Customs Act, FEMA and Companies Act.

“Although the Government is calling it a compliance window and not amnesty, a general promise not to prosecute the declarants, under various laws amounts to amnesty only” Confirms khan.

An olive leaf for tax evaders is coming under questions not only on moral grounds but also on the procedural ones. “It is not clear from the language of the Bill if a declarant would be grilled about the source of the income or assets by the specified authorities or no question would be raised by them. And if one admits illegal source, there is no guarantee that such a case is not going to be referred to the Enforcement Directorate for initiating action against the Prevention of Money Laundering Act (PMLA)” opines Shailendra, Tax expert and Editor of taxindiaonline.com.

“One may recall that after the VDIS Scheme was over, some of the State Sales Tax authorities had raised demand on the basis of additional sales turnover declared by some traders and firms. A few lessons also need to be learnt from the Kar Vivad Samadhan Scheme (KVSS) to iron out glitches before the CBDT notifies the actual contours of the Compliance Window” Shailendra cautions.

Voluntary disclosure schemes are not new in the world of taxation laws. India has implemented twelve such schemes staring from the Disclosure Scheme, 1951 to Voluntary Disclosure of Income Scheme (VDIS) 1997 but Tax amnesties have not fared well in India.  That is because there is no demonstrable seriousness on the part of the government in fighting tax evasion. The United States apparently collected 5 billion dollars of taxes because of its Offshore Voluntary Disclosure Program. Italy has collected 1.4 billion euros tax revenue in addition to repatriation of 56 billion euros. In fact, in a recent conference in Sydney, Pascal saint-Amans of the OECD stated that total collection was of 37 billion euros of different jurisdictions on account of voluntary disclosures. In all these countries, however, there were demonstrable prosecutions of some high profile individuals to suggest seriousness of government.

The key to success in chasing unaccounted money depends on the prior information about the residents’ accounts held abroad. The automatic exchange of information mechanism that has been accepted by many countries, including some tax havens, opens up the possibility for government having information on money hidden abroad. India did receive some information earlier but that was not under this route. The information received from Germany and France relating to LGT bank and HSBC was on spontaneous basis and was perhaps exchanged by these governments as a ploy to put pressure on Switzerland to agree to a more liberal information exchange scheme. These accounts are now quite old and have been the subject matter of intense debate. One report suggests that these account holders will not be entitled to come under the amnesty scheme.

Nonetheless, if tax offenders do their calculations, the one-time compliance window is not that bad a proposition to consider. Money stashed in tax havens only earns about 1-2% of interest rates with several risks attached to it. If one complies with the new dispensation, at least 40 % of their money could come clean without much hassle.

The whip

Apprehensions of a new Inspector Raj in Income tax system can’t be brushed away as the bill proposes to create elaborate legal machinery for conduct of enquiries, assessments, appeals to Commissioner/ Tribunal/ High Court/ Supreme Court, imposition of penalties, conduct of criminal prosecution in courts, and recovery of tax from assets etc, parallel to existing setup of income tax. It not only vests judicial powers with assessing officers under the Criminal Procedure Court (CPC) but also prescribes that every person in-charge and responsible to the company for the conduct of the business of the company shall be deemed guilty of the offence and shall be liable to face prosecution and punishment. Experts feel that the proposed law may give rise to multiple proceedings against the same person in the same year. Apart from two assessments, there will also be two sets of appeal proceedings, penalty proceedings and prosecutions even if provisions of two different laws merge in a particular case. Besides, there will be separate proceedings under the PMLA by Enforcement Directorate.

“Covering this legislation under Prevention of Money Laundering Act (PMLA) does not make sense as bill carries stringent recovery provisions. Also, appeals beyond a particular level can only be filed after depositing the assessed duty,” feels Somesh Arora, noted tax expert and Head of consulting firm Amicus Rarus.

“We need to run a reality check on varied offences being investigated under the PMLA. There are at least about 1000 offences for which the Enforcement department( ED) does not have the wherewithal to conduct investigation and prosecution. Why to load PML Act with ever increasing laws but no monetary limit of offence? This becomes a case of ‘size of noose choosing the size of neck”, he added.

The litigation

While nearly 100,000 cases are pending at the level of ITAT and CESTAT, the black money bill may fillip an already galloping litigation graph. Sudipto Banerjee advocate and Senior Legal editor feels “In the current chaotic situation, the additional litigations that may arise out of UFITIA Bill would further strain the limited resources of the revenue department. Under the Bill, the burden of proof would vest with the Department to establish the linkage between the assets located abroad and the source of income lying in India. Secondly, the Bill prescribes criminal sanctions i.e., imprisonment, which will be another challenging task for the Department to prove it before Court,” Banerjee pointed out.

The passage

The Black money legislation, as tabled in Lok Sabha on 20th of the last month, belongs to section 117 and 274 of the Constitution. Section 117 alludes to peculiar money bills which are proposed only after informing President in advance. These bills don’t require to be debated in Rajya Sabha (where the govt is in minority). Discussions in the parliamentary committees are not needed either, and Lok Sabha is bound to give it a go within 75 days of it being tabled. Having said that, it won’t be unfair to assume that govt is trying to nip impending hurdles in the bud.

The vacuum

Finance Ministry had tasked three Government think tanks to estimate unaccounted incomes in India and abroad, and to report the causes of generation/ holding of black money outside India. Yet no such report has been released in public domain and new Bill doesn’t address the causes of generation of black money as well.

The black money bill solely addresses assessment of undisclosed foreign incomes/ assets where evidence relating to these becomes available but contains no provision to counter cross border movement of unaccounted funds. Detection of undisclosed foreign incomes/ assets depends upon availability of information relating to these and the evidence that can stand judicial scrutiny.

Experts are is sync with the fact that the proposed new law does not create new sources of information nor does it lower the quantum of proof needed to establish these offences in a court of law. For successful recovery, the availability of reliable information of foreign assets and evidence that can stand test of judicial scrutiny is critical.

“The proposed new 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)” said, S. S khan, former member of CBDT.

Much will depend on the rigorous implementation of the law in future. Serious doubts, however, arise because of the postponement of GAAR by new govt. A country, which despite its stringent anti-rape law bears a negligible conviction rate in cases of rape , cannot guarantee the effectiveness of law against black money concealed in foreign countries. How much black money the amnesty brings back from abroad will only be known after the bill sees light of the day. However, govt will find it hard to defend Bill’s controversial provisions amid its sliding popularity.

(By Anshuman Tiwari )