Black Money Laws in India – UPSC GS3

Undisclosed foreign income and assets (Imposition of Tax) Bill, 2015 seeks to put curb on the menace of black money stashed abroad and also tax evasion. The law applies only to the residents and not to the professionals working in foreign countries and NRI’s.
  1. Will help to get a better perspective of the real economic situation of the country once all the unaccounted money is put to the rule book
  2. High penalties as imposed by the law (Being 90% of the value in case of non-disclosure of foreign assets and income) and stricter punishment (up to 10 years jail term).
  3. Made tax evasion a ―predicate offence and thus liable for an action under the Prevention of money laundering act, 2002, will enable the enforcement agencies to attach and confiscate the accounted assets held abroad.
  4. Compliance window tries to make the people come forward by themselves
  5. Assets amounting to less than 5 lakh not reported out of ignorance does not entail penalty
  1. The law does not prescribe the method to bring the black money back to the country.
  2. Bill is based on the premise that only foreign accounts and assets are the main source of black money, neglects domestic black money.
  3. Fails to provide a mechanism to retrieve the information from foreign governments.
  4. Domestic laws and international treaty obligations blocking the detection of black money are not addressed.
Steps taken by government:
  1. After getting elected, the government constituted a high level Special Investigation Team (SIT) on Black Money under two former judges of the Supreme Court.
  2. The government negotiated with foreign banking havens like Switzerland and Liechtenstein to co-operate in investigations on black money in bank accounts opened by Indian citizens in their jurisdiction.
  3. The government also introduced a bill on Black Money in the Lok Sabha to tackle the issue.
  4. Promotion of plastic money to reduce cash transactions.
To tackle the problem effectively, the government needs to focus on both aspects of the issue. Work on reducing generation, while at the same time work to bring back already generated black money for use in the country’s development. The government can take the following steps:
  1. CBI/ED can register a FIR on receipt of information of illegal accounts through intelligence sources, and then obtain a letter of request under 166A of CrPC from a designated court. Then the agency can seek Swiss cooperation under its international judicial assistance law to confiscate the account
  2. Using the German or the French method – monetary inducements are used in these countries to win senior bank officials as was done with HSBC in Geneva.
  3. US method – senior bank officers of union bank of Switzerland, who were based in Washington DC branch were arrested on charges of espionage to pressurize Swiss authorities into giving information about citizens who had illegally opened accounts.
  4. Legislative method – India can pass a law nationalizing all foreign accounts by Indian citizens. Then it can negotiate with the tax havens to get the money back while exempting the genuine accounts that have been voluntarily disclosed to the government.
Black money bill : This bill is enacted with the view of bringing back the black money and stopping the black money going abroad but there are many loopholes in the bills.
  1. NRIs are not included in the bill, they do not need to declare their incomes. So, Indians who are moneyed, work out an arrangement with NRIs to hold their wealth and show their incomes through legal arrangements.
  2. The provisions of the Bill will be applicable only if the government is able to detect incomes and wealth held abroad. The Bill has no mechanism for doing so.
  3. An amnesty scheme is offered to come clean. There will be no punishment if one discloses the assets and incomes abroad in the specified period and pays the taxes within six months. Thus, the inexperienced ones who had held illegal wealth abroad in their own names and earned incomes on them would have a chance to come clean.
  4. The black wealth of most ‘experienced’ Indians would be parked there via shell companies in tax havens and hence not be counted as Indian money. For this people use layering.
  5. The Bill contains no mechanism to identify funds going out or being held abroad. The government argues repeatedly that it will get information via the Double Taxation Avoidance Agreement (DTAA) or Tax Information Exchange (TIE) agreement with a number of governments. But these channels only record tax information on sources of disclosed income.
  6. Doesn’t proposes any mechanism to stop the generation of black money
Special Investigative Team (SIT) on Black Money has recommended several measures to tackle the issue of black money circulation in its three separate reports. Comment on the important recommendations of these reports. (200 Words)
  1. Senior government officials (like RBI governor, SEBI chief, CBI director, secretaries of govt. depts. Etc.) shall file affidavits that they do not possess illegal money abroad. There are allegation that government officials are the most corrupt. This provision partially addresses this.
  2. The SIT has recommended that India’s double taxation treaties and mutual assistance treaties of income-tax with other countries be redrafted as they are one-sided. This recommendation comes in light of the fact that despite having a double taxation avoidance agreement with Mauritius, several money trails have gone cold due to lack of assistance from authorities there.
  3. The second major recommendation of the SIT is to amend the Prevention of Money Laundering Act (PMLA) to introduce a provision under which the Enforcement Directorate (ED) would be able to attach the properties of those who do not bring back black money within the stipulated time frame. Currently, the ED has the power to only attach properties bought with the proceeds of crime.
  4. All cash above 10 lakhs in possession shall be made illegal. Similar restrictions have been put in place by many European countries. While this would control holding of unaccounted money to a large extent, it must be seen that small transactions, which make a bulk of common man’s daily transactions, are not affected.
  5. Special courts to hear income tax prosecution cases must be set up. Currently, as many as 5000 IT prosecution cases are pending and so additional courts will bring relief.
  6. A central KYC Registry should be established with all law enforcement agencies, Registrar of Companies and financial institutions having access to its database. Such inter-connection will help identifying multiple transactions by one person with different IDs.
  7. The Financial Intelligence Unit, which is the national Centre for receiving, analyzing and disseminating information related to suspected cases of money laundering, must be harnessed to exchange actionable intelligence on proceeds of crime in other jurisdictions.
  8. Department of revenue intelligence need to be given power to check any irregularities in Special Economic Zones, which are free from any government oversight for now
The above mentioned recommendations are progressive and will go a long way in helping curb the menace of black money. While, they sound ideal on paper, the real challenge lies in their effective implementation. In a report by Global Financial Integrity India has emerged at 4th rank among 25 countries for illicit financial transaction. Given the huge amount of illegal capital stashed away in foreign accounts and a parallel black economy running in India, government need to act on these recommendation as soon as possible.
Critically comment on the recent black money law and examine the merits and demerits of the same. (200 Words)
Critically comment on the provisions of recently passed Black Money Bill and their effectiveness in addressing the issue of black money and corruption in India. (200 Words)

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