Will the Black Money Law Work?

If the generation of black money is not curbed, the new law will be just another amnesty scheme and tool for tax terrorism. The Narendra Modi government swept into power on the promise that it would provide minimum government, maximum governance and helps bring back the vast hoards of India’s wealth that is ostensibly stashed around the world. For almost a year, the government did very little. The prime minister has had to face barbs and offer an explanation to parliament. Soon after, the government introduced The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill in Lok Sabha. There is a strong feeling that no political party would want to appear to be against the return of black money stashed abroad. So, the law may come into force quickly.

 But, will it succeed in getting people to bring back unaccounted overseas money when all other efforts have failed in the past? To give the government its due, it certainly seems more serious about intent and implementation. The proposed legislation seems simple and comprehensive and has adopted a carrot-and-stick approach. It provides a limited, one-time compliance opportunity to come clean on payment of a gross tax of 30% and an equal penalty. Moreover, those who have omitted to disclose foreign accounts with ‘minor’ balances of up to Rs5 lakh will be exempted from penalty and prosecution. Failure to disclose and being discovered later will not only attract tax of 30% but also three times the tax as penalty. Willful tax evasion on foreign income or assets will attract prosecution and is punishable with rigorous imprisonment from three to 10 years. The law covers benami ownership and also those who induce or abet another person (probably employees) to file false returns. This covers banks and financial institutions which are notorious for helping people open overseas accounts and to hide the trail through a chain of investment companies and false documents. International private bankers openly canvass such business in India and help conceal income by setting up a chain of numbered accounts and dummy companies. HSBC was caught helping Americans of Indian origin to evade US taxes by opening bank accounts in India; its Geneva branch has a number of Indian accounts which are being investigated. HSBC is certainly not the only one; it is just the one that got caught. Even the Securities& Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) have hit upon on several trails of unaccounted overseas accounts but allowed them to be buried through consent orders or compounding.

Many wealthy Indians, as well as their key money-managers and cohorts, have become citizens of tax haven countries such as Macedonia, Bulgaria, Montenegro and Romania by investing anywhere between 400,000 to a million Euros. They continue to be employed or do business here like Indian citizens often without disclosing that they are foreigners. The family of Subrata Roy (of the Sahara group) is among those who are Macedonian citizens with known wealth and businesses there. Will the new legislation, with its stringent provisions, induce all these people to bring back their undisclosed foreign wealth? It depends on two factors. The government’s seriousness about the Bill will be established only if the generation of new black money is stopped. A large amount of black money is generated for political funding and to route money to political parties/politicians. Unless that ends, businessmen will always be confident that any attempt to unearth their concealed stash can be stymied.

The on-going purge after the 2G scam and the cancellation of coal blocks certainly indicates that big-ticket corruption of the UPA2 variety has ended. But this is mainly because of Supreme Court-directed actions, following public interest litigation based on the Comptroller & Auditor General’s reports. All of them pertain to actions and decisions of the UPA period. But there is no sign of change in the real estate sector, which is the other large block of monumental corruption, or even in the bribes and speed money that ordinary Indians are forced to pay to net a sand babus for routine work or to avoid harassment. On the other hand, we have worrying examples of whistleblowers (vigilance officer of All Indian Institute of Medical Sciences) and diligent officials like Dr Ashok Khemka being transferred for doing their job right. Such actions do not in still public confidence.

Then there is the ‘one-time tax compliance on payment of a penalty’ offered by the black money Bill. Former union secretary, EAS Sarma, has written to the government to say, “I will not hesitate to seek judicial intervention in this matter if the government decides to go ahead with such a dubious amnesty clause (this was before the Bill was introduced in the Lok Sabha).” On the other hand, countries like Australia and the US have successfully used such amnesties to force their citizens to disclose substantial sums of money stashed in international tax havens. It worked in those countries for two reasons. The threat of criminal prosecution and penalties for non-disclosure was serious and one-time compliance was made easy and workable. Like the Indian Bill, the US too offered only a ‘partial amnesty’, meaning that tax had to be paid with interest and penalty. The Indian law has only proposed flat tax of 30% with an equal penalty. But the key here is whether the amnesty will offer quick closure, or whether there will be a permanent threat that accounts can be opened going back decades. A leading tax lawyer says that, although the black money Bill provides for due process, issue of notices and appeals, none of it really works in practice and people are at the mercy of assessment officers and their capricious orders, justified on the grounds of meeting ‘tax targets’ set out by the finance ministry. The Income-Tax Act already allowed assessment of those with overseas income to be opened going back 16 years; the black money Bill prescribes no such limit; this means that tax officials can take their scrutiny back for decades. This could be a huge deterrent to disclosure; in fact, some lawyers say that requests for help to become non-resident Indians have resumed for, the first time, after the BJP came to power in May2014.

Unfortunately, there has been very little pubic discussion on the black money Bill, although tax lawyers have been quietly flagging their concerns to the government. These discussions and debates ought to happen in the public domain and all concerns should be answered and clarified explicitly. The key would be the operation of the ‘one-time compliance’ facility and whether it will lead to effective closure after a process of disclosure, hearing and declaration and payment. For companies, there are some niggling issues—like the definition of what is ‘normally resident in India’— and what constitutes ‘place of effective management’ and its interpretation. If tax officials are allowed to decide this at their discretion, it could have serious implications for foreign companies with significant Indian operations. They would not only be taxed as per Indian laws, but would unintentionally find themselves falling foul of provisions of tax deduction at source (TDS) or minimum alternative tax, etc. All these have draconian implications and penalties. I believe that the government has to do a lot more to create public confidence that it is serious about eliminating corruption and black money. Otherwise, the black money Bill will only be a tool of tax terrorism, which is selectively used to fix political rivals or dissent. @moneylife.in