New overseas black money law : A primer

A well intentioned initiative but needs to be implemented with caution

manojkumarhs

Manoj Kumar | March 19, 2015


#foreign income bill   #blackmoney law   #arun jaitley  

Giving concrete shape to finance minister Arun Jaitley's announcement of a bill to trace black money, the union cabinet has just approved a law to track unaccounted wealth by strengthening of the prosecution mechanism and enhancing exchange of information, also including in its ambit stringent provisions for prosecution of offences.

The Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, as the new legislation is known, was first declared during the budget, and signals the fulfillment [or at least the start thereof] of one of the current government’s most prominent poll promises prior to the 2014 general elections.

The need for such a law has arisen because black money, being a serious issue that has a debilitating effect on governance and public policy, and which affects the poor disproportionately, has become an increasingly common and pervasive phenomenon.

Certain sectors have come to be more vulnerable than others to its consequences, including land and real estate, bullion and jewelry, financial markets, public procurement, the non-profit sector, informal sector and cash economy; the bill focuses on how to stem the manipulation of financial records and accounting techniques that are used to generate black money.

This development is especially important in the face of such recent events as the release of a list by a newspaper of Indian account holders, many of which are suspected to include unaccounted assets in a prominent banking facility’s Geneva branch. Experts have held this as a classic example of tax evasion caused by the significant lowering of standards of due diligence.

The finance minister has also announced a slew of other measures to deal with this situation, such as the disincentivisation of cash dealings in real estate and other transactions, and a new, more comprehensive Benami Transactions (Prohibition) Bill to re-enforce existing law. In addition, the cabinet has given approval for India to join the multilateral competent authority agreement to facilitate automatic exchange of financial account information, which will enable the government to receive information about Indian assets held abroad, from the US and other countries.

Important provisions in the proposed bill include:
 

  • Offences will be non-compoundable and offenders will not be permitted to approach the settlement commission. Individuals, entities, banks and financial institutions would be liable for prosecution and penalty if found abetting such offences.

 

  • Penalties at the rate of 300 per cent of taxes will be levied on the concealment of income and assets and evasion of tax in relation to foreign assets; such "predicate offences" will also be prosecutable with rigorous imprisonment of up to 10 years, and enable enforcement agencies to attach and confiscate the assets in question.

 

  • Such income will be taxable at the maximum marginal rate. Exemptions or deductions, which may otherwise be applicable in such cases, shall not be allowed.

 

  • The government will give a provide an opportunity to those stashing black money abroad to declare their wealth and escape prosecution under the proposed law, but those doing so will not be exempt from paying tax and being penalised

 

  • The non-filing of income tax returns or filing or returns with inadequate disclosure of foreign assets has been made liable for prosecution, with punishment of rigorous imprisonment of up to 7 years.

 

  • Beneficial owners or the beneficiaries of foreign assets will be required mandatorily to file returns, even if there is no taxable income.


In these circumstances, stakeholders must also ponder what further steps could be taken to strengthen existing infrastructure in order to minimize black money related offences. Some that have been suggested previously by a ministry white paper on the subject include:

  • Reducing disincentives against voluntary compliance – Measures like rationalization of tax rates and reducing transaction costs by providing electronic and internet-based services to pay tax.

 

  • Reforms in sectors vulnerable to generation of black money – Policy initiatives such as deducting tax at source on payments made on real estate transactions and tax incentives for use of credit/debit cards to boost the cash economy.

 

  • Creation of effective credible deterrence such as a Goods and Service Tax (GST) and strengthening the direct tax administration.

 

  • Creating public awareness and public support, enhancing the accountability of auditors and participating in international efforts.


Having recourse to information as well as black money allegedly stashed abroad has been an uphill task thus far, for bot the UPA and the present governments. The proceedings initiated in the recent past against alleged defaulters have also raised the debate whether the tax authorities need to be more sensitive to genuine money parked abroad by India Inc. as against public money removed from the development process and allegedly syphoned off abroad. A need for balance in implementation of any such initiative is imperative for the drive to be a sustainable one. We need to see how the tax authorities bring the new law to the ground in times to come.


 

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