The following piece appeared in the document ‘One Year of the NDA Government – 2015, Promises and Reality: A Citizens’ Report’ published by Wada Na Todo Abhiyan (WNTA), a people’s movement that comprises of over 4000 civil society organisations in India.
Black money can be defined as asset, income or wealth which is not accounted for and, therefore, not taxed under law. High volumes of black money have been reportedly flowing out of the Indian economy and some have been brought back in via legal means through a process known as ‘round tripping’. Tax havens—low tax secrecy jurisdictions in several developed countries in Europe (Luxembourg, Switzerland etc.), states in North American countries (Florida, Utah, etc.) as well as crown dependencies (Jersey, Guernsey etc.)and island nations (Mauritius, Singapore, Vanuatu etc.)—are responsible for facilitating transfer of secret illegal wealth and income across the world. Domestic policies may be responsible for facilitating the conversion of such illegal wealth, income or asset into legitimate means in real estate, stock markets or banks.
Steps taken by the UPA government to address the issue of black money may be looked at from these four lenses:
(a) Curbing generation of black money
The White Paper on Black Money published by the Ministry of Finance in 2012 states that black money can be generated through illegal activities such as smuggling, racketeering and unauthorised mining. Most of these are covered under the Prevention of Money Laundering Act 2002.The White Paper reports that black money can also arise as a result of “legally permissible economic activities which are not accounted for and disclosed or reported to public authorities as per law or regulations, thereby converting such income into black money.” This might be the result of a desire to evade taxes or a high cost of compliance.
The White Paper goes on to identify several sectors that are vulnerable to generation of black money:
(i) Financial Sector (ii) Real Estate (iii) Bullion and Jewellery (iv) Cash Economy (v) Mining and Property Rights over Allocation of Natural Resources (vi) Equity Trading (vii) Misuse of Corporate Structure (viii) Non-profits and the corporate sector
(b) Preparation of databases, frameworks and intelligence
The Income Tax Department can resort to surveys and searches to detect and collect evidence of tax evasion. It can scrutinise errors in annual information returns. Integrated Taxpayer Data Management System, PAN database and IT Department applications are useful in this. India has signed Double Taxation Avoidance Agreements with several other jurisdictions in the world which allocate ‘taxing rights’ between two countries. At present, the ‘Exchange of Information’ standard is ‘on request’. It will become automatic in 2017.
(c) Punitive measures to act as a deterrent to future violations
More efficient monitoring of audit trails of transactions could be an effective deterrent. Legal measures that prescribe punitive fines on tax evasion can also deter violations. At present, tax evasion is a civil offence. News reports suggest it may be made a criminal offence.
(d) Addressing staff shortage
As reported by the Central Board for Direct Taxes (CBDT) in 2012, staff shortage in CBDT, Enforcement Directorate (ED), Financial Intelligence Unit (FIU) and Central Board of Excise and Customs (CBEC) is around 30,000 personnel. An Asian Development Bank report in 2014, which analysed tax administration in Asia and the Pacific, noted that India has one of the most under-resourced and understaffed revenue bodies in proportion to its population size. News reports say that given its staff crunch, ED could take six years to probe black money cases (The Economic Times, December 2014). Implementation of existing or new legislation on black money requires the administrative machinery to be significantly strengthened.
Initiatives taken by the NDA government
Although it is important to identify tax evaders who have wealth stashed in secret bank accounts abroad, an excessive amount of attention has been paid on it by the media and policy actors concerned. As mentioned in previous sections, there are myriad forms in which black money can be generated and transferred.
The BJP in its election manifesto promised to initiate “the process of bringing back what belongs to India.” During the course of the first six months in power, the NDA government cited that the names would be automatically revealed “once the court is informed”. The government eventually only revealed the names of two individuals and a company in court while handing over the entire list (same as that of UPA’s) in a sealed envelope. However, a sting operation by the International Consortium of Investigative Journalists (ICIJ) called ‘Swiss Leaks’ combined with Indian Express revealed a list of Indian foreign account holders in HSBC Bank, Geneva in February, 2015. An investigation into the legality of the money stashed in these accounts is ongoing.
To tackle black money, the NDA government made two announcements—The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill 2015, also called the Black Money Bill, and the formation of a Special Investigation Team (SIT) on the directions of Supreme Court. The Black Money Bill, passed recently by Parliament, details punitive actions entailing detection or voluntary disclosure of illegitimately acquired wealth. The Black Money Bill criminalises tax evasion in relation to foreign assets with imprisonment upto 10 years and penalty of 300% among other features. The SIT, in its third interim report submitted to the Supreme Court on May 12 notes that “there was not much data-sharing among the agencies even after repeated reminders for smooth inter-agency coordination, the SIT recommended a study of the databases of the various departments by the Central Economic Intelligence Bureau.” (The Hindu, May 2015)
India has been a vocal supporter of automatic information exchange in the G20. It was one of the first developing countries to support its adoption as a global standard. In a written reply to the Rajya Sabha in August 2014, Minister of State for Finance and Corporate Affairs Nirmala Sitharaman said, “Under various bilateral or multilateral agreements, the government expects to receive information about taxpayers hiding their money in offshore financial centres through multi-layered entities with non-transparent ownership on an automatic basis.” Even with this in place, it is important to note that the Indian government does not have information on foreign account holders except for those in HSBC Bank, Geneva and LGT Bank, Liechtenstein. It is difficult to initiate investigations on secret bank accounts without evidence of illegality and successive Indian governments have struggled to establish that in the past.
In recent times, revenue authorities in India have gone on an overdrive to take care of various deficiencies in tax administration. CBDT has prepared a blueprint for ‘Data Warehousing and Business Intelligence’ (The Financial Express, August 2014) that envisages to “streamline and enhance the non-intrusive surveillance capabilities of the I-T and for harnessing the potential of information being collected.”
This collation of data will complement the internal databases of investigation and criminal investigation wings which includes information on PAN, e-filing data, TDS and other specific information (The Times of India, April 2015). In 2014, Department of Revenue Intelligence announced that during the 2013-14 financial year, 694 cases of commercial fraud involving customs duty evasion worth Rs 3,112 crore was detected (The Economic Times, April 2014). The I-T Department also slapped notices on several high profile sale of shares like in the cases of Cairn Energy, Vodafone and Shell. In spite of favourable verdicts for the multi-national companies, the taxman went after the companies asserting their right to tax. But complex corporate legal structures meant that the revenue authorities’ arguments didn’t hold up in court. The business class along with the media, as a result, is concerned that the zealousness with which the revenue authorities in India have gone about their jobs has resulted in the harassment of honest taxpayers. The BJP government which promised in its election manifesto to end ‘tax terrorism’ and introduction of an ‘investor-friendly regime’ has been put under repeated pressure to warn tax authorities to slow down.
As far as measures regarding curbing black money generation are concerned, there are two palpable measures by the NDA government in the last year. One is the expected introduction of the Benami Transactions (Prohibition) Bill 2011 which will enable confiscation of benami property and provide for prosecution and the other is the announcement for establishing Real Estate Investment Trusts (REITs).While the former will enable confiscation of benami property and provide for prosecution, the latter can channelise investments in the realty sector through a regulated mechanism. It could create a robust valuation system to help calculate real estate prices. An independent party would assess property values every six months and the net value will be declared twice a year to make it more transparent. Unfortunately, disputes over high tax rates have deterred developers from using this route and the scheme is yet to take off.
Besides this, the government is still to take any action on the use of Participatory Notes that have been continuously criticised as an anonymous vehicle for round tripping illegal wealth and assets into stock markets in India. The Tarapore Committee in 1997 had recommended its abolition, but neither NDA nor UPA has made a move on it. Another concern is the lack of action to address the issues of staff shortages throughout enforcement agencies.
In conclusion:Though legislation taking severe action against future tax evaders is welcome, stronger measures are required to curb generation in vulnerable sectors. The government should make the names of the Indian having accounts in foreign banks public in line of its electoral promise. It should take retrospective action against willful defaulters. The government should make all effort to keep its electoral promises of bringing back the black money to the country.
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