The Panama Leaks have once again put the spotlight on tax evasion and black money. In the ongoing struggle against black money, has India come to its wits’ end? With robust infrastructure and agonised masses, are we really going to see the end of the menace soon?
First it was Swiss Leaks, now it is Panama leaks. We cannot speculate what leaks will follow next. According to Ranjeev Dubey, Managing partner, N South law firm, “The Panama Leaks change nothing except perhaps the location of the tax free money.” We have many such locations in the world where black money can be stashed. So, no wonder, if tomorrow the India Express, the lone paper living up to its words, comes up with leaks with fanciful names such as Bahamas Leaks, or Bermuda Leaks, or Tobago Leaks or Cayman Leaks.
“Unless you change the incentives, in India and internationally, nothing will change,” adds Dubey. There are many tax havens in the world which have nil or negligible tax on profits made by foreign companies, very lax rules for setting up companies and very stringent secrecy laws.
Nauru in the Pacific has only a few thousand inhabitants but 400 registered Banks. Cayman Island, which has a population of less than 55, 000 people, has invested ` 85,000 crore in India! Can You believe? However, it is not just small island, in fact, reports reveal that even London, New York, Tokyo, Paris and Frankfurt also have thriving offshore businesses.
According to Global Financial Integrity, tax havens aren’t tax havens just because they have low taxes—rather, what makes a tax haven is its opacity of financial information. While the legal regimes that tax havens set up to enable this secrecy are complex, their basic outline is simple— banks, companies, trusts, or other financial actors in the country are allowed to accept money from basically anywhere without reporting it to the authorities in the country where it originates or from which it is controlled.
So, do these factors constitute such great incentives that prompt wealthy businessmen and corrupt politicians to keep their unaccounted money from being taxed? Well the issue of tax evasion, tax avoidance and money laundering are far more complex. The presence of tax havens alone cannot be the whole cause of the problem.
However, After the Panama Leaks, the Special Investigation Team (SIT) set up by the Supreme Court to trace black money stashed abroad has asked three government agencies to prepare a report on allegations. Retired Supreme Court judge Arijit Pasayat, who is the vice-chairman of the SIT, told media that the reports on 1.5 million documents leaked from the files of Mossack Fonseca need to be “verified” by the Enforcement Directorate, the Income Tax Department and the Directorate of Revenue Intelligence.
The Panama Leaks contain documents which show that Mossack Fonseca, the Panamanian law firm, has set up more than 240,000 offshore companies for clients around the globe. As far as India is concerned, the leaks contain names of 500 Indians, including some prominent figures among them, who have opened shell companies with their help and have accounts in various tax havens.
Well, this was not a shocker of a revelation, except for some names which one thought would never appear in such leaks and expose. The Indian Express last year had revealed the names of those Indians who had accounts in the Swiss banks. Even the revelation then was not a surprise as we all knew that many Indian business men and the politicians had accounts in Swiss banks. In fact, black money has been a big issue in India for many years now. In the last Lok Sabha elections, this was one of the most important poll issues, and the BJP had promised to bring back all black money from abroad if elected to power and promised to deposit 15 lakh to every Indian bank account. However, Amit Shah later clarified that it was a ‘chunavi jumla’, made by them to win elections.
Black money is a universal problem, not just confined to India. The governments all across the globe have been complaining for many years now about tax evasion leading to great loss to their revenue. The Organisation for Economic Co-operation and Development (OECD) estimates annual losses from tax evasion by corporates at $100240 billion annually. The Finance Minister Arun jaitley announced after the Panama Leaks that there will be no holy cows and that the government will deal with it with tough hand.
In the case of Panama Leaks, the experts point out that there are some points that the government agencies dealing with black money must examine. The most important is the route through which the money was taken out of India and over or under invoicing of imports, exports and other business transactions. Many of these could reveal Foreign Exchange Regulation Act (FERA) and Foreign Exchange Management Act (FEMA) violations. Second, the source and quantum of money that was moved out could be money on which tax has not been paid.
“With G20 initiatives, FATCA and bilateral transactions in place with effect from 2017, the world is going to be a far more transparent institution and therefore, this kind of an adventurism will prove to be extremely costly for those who have indulged in it.”
However, one has to look at the legitimacy angle too. The government of India has liberalised its economic policies. it has allowed sending funds abroad under Liberalised Remittance Scheme (LRS). But there is limit on the amount one can transfer and at present it stands at $ 2, 50,000. This scheme was started in 2003,therefore, it is vital for investigating authorities to find out the dates of such transaction and legality and illegality involved with it.
As we know money is laundered in a three stage process. First is placement by which money is taken into the global financial system and away from where it was made in the first place. Then comes layering in which money is pushed through multiple transactions, using a number of countries and a handful of shell companies bought off the shelf. Finally, the integration takes place wherein money is taken back to a place and in form in which it can be spent.
India has been trying of late to put in place a robust mechanism to fight off the menace of black money. It enacted a new law which provided taxpayers the benefit of a compliance window to come clean. The window ended in October last year and Jaitley has recently said those who did not take advantage of the compliance window last year to declare illegal assets abroad will have to bear the brunt. He also stressed that the global initiatives to deal with Black money will be in place by 2017, making it extremely difficult for individuals to hide their assets. “With G20 initiatives, FATCA and bilateral transactions in place with effect from 2017, the world is going to be a far more transparent institution and therefore, this kind of an adventurism will prove to be extremely costly for those who have indulged in it,” he said at a function at CII.
However, with this one time compliance window under the Black Money Act, the Government has collected a total of ` 2,428.4 crore in taxes after over 600 declarations were made by stash holders to the IT department. A total of 644 declarations were made under the compliance window, provided under the anti-black money law.
Under this compliance window of the Black Money Act, the government had given immunity from prosecution under FEMA, Prevention of Money Laundering Act and four other laws to persons declaring undisclosed foreign assets. Disclosures made enjoyed immunity from prosecution under the five Acts viz. the Income tax Act,
“Action under PMLA for Trade Based Money laundering. All cases of trade-based money laundering detected by DRI where violation of section 132 of Customs Act above the threshold provided for in Part B of Schedule of PMLA, has been found must be shared by DRI with the Enforcement Directorate to enable ED to take action under Prevention of Money Laundering Act.”
Wealth Tax Act, FEMA, Companies Act and Customs Act. It, however, did not provide immunity from prosecution under, any other Act’. For instance, if the undisclosed asset has been acquired out of the proceeds of sale of protected animals the person will not be eligible for immunity under the Wildlife (Protection) Act, 1972. The offence of willful attempt to evade tax will also not be an offence under the Prevention of Money Laundering Act (PMLA).
However, the government has been able to brought to tax some offshore accounts which were revealed to them through intergovernment efforts. As per to a report filed by a Supreme Court appointed Special Investigation Team (SIT) in December 2014, there were 428 actionable cases of the ‘HSBC List’ of 628 persons. The amount involved was ` 4,480 crore. Of these, the government had finalised a decision on 140 assessees and an amount of ` 3,000 crore has been brought to tax on account of deposits made in unreported foreign bank accounts in this case.
In another report, the ministry has claimed that it has managed to get the declarations of around ` 20,000 crore in the past two years through search and seizure operations across the country.
The government, in this year’s Budget, once again came out with a compliance window to encourage domestic black money holders to declare assets in the four-month compliance window. They can pay a total of 45 per cent tax and penalty and come clean. However, this scheme was criticized by Rahul Gandhi as a ‘fair and lovely scheme of the government.” However, many have doubted the utility of such schemes in the long run. In fact, CAG once remarked that the disclosure schemes encourage people to become “habitual tax offenders”, knowing full well that they can hoard money without paying income taxes.
After a PIL filed by senior advocate Ram Jethmalani to bring back India’s black money stashed abroad, the Supreme Court had set up a SIT led by two former apex court judges, Justices M.B. Shah and Arijit Pasayat. The SIT has given many recommendations to the government, some of those, which were submitted in its third report, are as follows:
These recommendations will really go a long way in curbing the generation of black money, if implemented by the government. However, the government has said it would take a view on the SIT suggestions after consulting with the stock market regulator, the Securities and Exchange Board of India (SEBI), the Reserve Bank and other institutions.
Meanwhile, the vice-chairman of SIT, Justice Pasayat, commented late last year that the volume of black money stashed inside India is much more than that kept abroad. “The volume of black money stashed in India is much more than it is now in the foreign countries. If the generation of black money is stopped, its flow to the foreign countries will be substantially reduced,” Pasayat said in a meeting with government officials.
Black money is a big menace for the Indian economy. It leads to tremendous loss in the tax-revenue for the government. According to a report on black money, the manifestation of black money in social , economic and political space of our life has a debilitating effect on the institution of governance and public policy in the country. The elimination of black money from Indian economy is needed to make economic progress of the country and its people. However, the measures taken so far are only aimed at unearthing black money, and not preventing the generation of black money. Businessmen and politician have a vested interest in it. According to Dubey, “The biggest compulsion driving black money generation in India is the financing of elections. Constituencies ask for cash and that must be generated. All this is well known. Unless the electoral costs of each candidate are publicly funded, the compulsion to generate cash will continue.” “Second, India’s elections are fought for financial benefit, not ideology. Some take cash up front. This is the smaller piece but it is still a huge cost for candidates. Others settle for post victory benefits. This is the bigger piece. It is a system by which groups of political elites collaborate to win elections, acquire power and then convert public assets to private wealth. It’s a business. Thus, vast empires are created. This is universal,” he adds.
So, what is the way forward? We have robust laws but the implementation is poor. So what we need is apart from public funding of candidates during elections, rigorous enforcement of existing laws by honest administrative institutions backed up by an efficient judicial system designed to deliver quick and fair results in a predictable timeframe.
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