Earlier this year, India’s Parliament passed a new bill aimed at unearthing “black money,” unreported and often illicit funds stored abroad as a means of tax avoidance. This move, spearheaded by Finance Minister Arun Jaitley, could not come at a better time, both from a political position for Prime Minister Narendra Modi as well as in terms of taking advantage of global action targeting tax havens used to stash ill-gotten gains around the world. While doubts exist as to the ability of India to fully enforce the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015, it is certainly a step in the right direction.
The scope of India’s black money problem:
Coming to grips with the extent of India’s black money problem is difficult: definitions fluctuate, and assessments often use different metrics. For purposes of this post, black money is defined as income illegally obtained and/or not declared for tax purposes. Prime Minister Modi and the Bharatiya Janata Party have estimated that approximately $1.36 trillion (RS 85 lakh crore) of Indian wealth is stashed away in black money accounts, while the US think tank Global Financial Integrity uses the more modest estimate that India has lost $124 billion in black money between 2001 and 2010. It is safe to assume that despite the wide discrepancies in estimates, black money is a problem.
Prime Minister Modi made various black money promises throughout his 2014 election campaign, assuring voters he would bring these funds back into India, tax them, punish perpetrators, and make it more difficult to stash ill-gotten gains in the first place. While one of his first decisions as Prime Minister was to set up the Special Investigation Team (SIT) to unearth Indian black money, Modi has not yet been able to deliver on his promises. The issue was pushed to the forefront of national discussion last February when the Indian Express, in partnership with the International Consortium of Investigative Journalists and Le Monde, revealed documents leaked from HSBC’s private bank in Switzerland indicating that the bank had aided thousands of customers in tax evasion and that 1,195 Indians held accounts with the bank with an estimated total balance of $4 billion from 2006-2007. According to officials from the Central Board of Direct Taxes (CBDT), as result of these and other revelations, $508 million of undisclosed income has since been taxed. A confidential October 2014 CBDT note indicated that the office was considering whether HSBC and/or HSBC officials should also be prosecuted for their role in hiding the funds.
The new bill: stiff penalties and a one-time compliance option
The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 will apply to all persons resident in India, covering both undisclosed foreign income and assets, including financial interests/beneficial ownership of any entity. Once discovered, undisclosed income will be taxed at 30% of the current value of the income or asset, with no possibility of exemptions or deductions for losses (as is possible under the current Income Tax Act, 1961). The penalty for non-disclosure will be triple the amount of tax charged (i.e. 90% of the income or value).
Punishment for willful tax evasion in relation to foreign income or assets will include imprisonment of 3-10 years. Failure to file a return or furnishing inaccurate information will be punished with between six months and seven years imprisonment. Abetting or inducing another to make a false return will be punishable with six months to seven years imprisonment, with this provision applying to individuals as well as banks and financial institutions. Offenses will be non-compoundable and offenders will not be allowed to seek settlements. To protect against persons holding accounts with smaller balances which may not have been reported due to oversight or ignorance, the Act includes a de minimus standard of Rs. 5 lakh (about $8,000 USD). The law also proposes amending the Prevention of Money Laundering Act, 2002 to include tax evasion as a scheduled offense.
The Bill offers a one-time compliance opportunity, a window during which individuals may file declarations of undisclosed income, pay a 30% tax and 30% penalty. Those who take advantage of the compliance opportunity will not be prosecuted under the new Bill’s far more stringent provisions.
The success of this bill hinges on two overarching issues: the first centers on questions of enforcement, and the second looks at whether the bill is in some ways too little, too late.
Will the new law be successfully enforced?
The law’s success is tied to whether India can successful unearth black money accounts, both in terms of encouraging those with black money accounts to take advantage of the one-time compliance window, and also in terms of the government’s ability to identify, prosecute, and punish those who hide illicit wealth. Individuals with undisclosed accounts will be doing a careful calculation as regards their risk of being discovered. It is worth noting that India’s current HSBC prosecutions resulted from HSBC whistleblower Hervé Falciani as opposed to India’s own investigations. Furthermore, while the government has since taxed over $500 million of former black money, given the scope of the problem this is a drop in the bucket. As for the one-time compliance treat, this is not in fact the first time India has adopted such a scheme, with the most recent being the 1997 Voluntary Income Disclosure Scheme. Despite these concerns, however, there is reason to be hopeful.
We are in the midst of a global push to shine a light on tax havens, reveal beneficial ownership of corporations and property and bring black money to light. India’s bill benefits from this global transparency momentum, but also from a few specific programs which are unrolling at the same time. On the same day India’s Cabinet cleared the bill to go to parliament they also signed a financial information sharing agreement with the United States. Under the auspices of the US Foreign Account Tax Compliance Act (FACTA) India will provide reports on accounts held or entities owned in substantial part by US citizens in India and in return the US will furnish information on investments made in the US by Indian nationals.
Furthermore, the Cabinet has also purportedly approved India joining the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Financial Account Information (AEOI). Through FACTA and MCAA, India will have access to tax information about assets of Indians abroad, including beneficial ownership information, from 52 jurisdictions. These agreements make it much easier to national tax authorities to identify citizens hiding money in offshore financial centers and tax havens. The AEOI will kick in in 2017, and India has been strongly encouraging other countries to get on board.
In addition to sharing information about individuals, countries are also taking aggressive stances against the banking and financial institutions which facilitate the camouflaging illicit funds, cutting down on the jurisdictions where illicit funds may find safe haven. The SwissLeaks scandal, for example, set off a string of actions. According to the Swiss Financial Market Supervisory Authority (FINMA), which is responsible for regulating banks, insurance companies, and financial market institutions in the country, “Germany, France, Belgium and Argentina have followed the US in launching high-profile criminal investigations, while Israel and India are threatening to do so.”
Finally, the fact that the nearly 1,200 names already revealed through the HSBC Swiss Leaks scandal—some of whom are rather powerful—may not participate in the compliance program increases the government’s claim to being committed to rigorous enforcement. While investigations and prosecutions are not lightning-fast, they are coming: According to CBDT officials, 27 account holders had paid penalties and 15 were facing prosecution for concealment of income.
Is the bill too little, too late?
Unfortunately, there is no rest for the wicked. There are some indications that those with secret accounts abroad saw the writing on the wall years ago and have been acting accordingly. For example, the amount of money stored by Indians in Swiss bank accounts has dropped precipitously in the past nine years. While 41,400 Rs. crore was stored in Swiss accounts in 2006, that number has fallen by more than half to 14,000 Rs. crore in 2013. These funds may have already come back into India as “white money” through investments in real estate or other goods through a process called round-tripping, or may have been placed in tax havens more out of reach of globally coordinated anti-black money networks (see here for a 2011 paper by Chalalpati Rao and Biswajit Dhar which estimated that up to half of foreign direct investments in India could be the result of round-tripping)
While the bill does little to address the round-tripping question, if nothing else Indian authorities are on alert. Finance Minister Jaitley’s proposal that customs offenses such as false declarations and false documents be brought under the money-laundering act strengthens the authorities hand in punishing attempts to sneak black money back into the country. Revenue agencies under the finance ministry have been paying closer attention to possible trade-based laundering routes, including traditional channels of gold and diamond shipments, as well as any irregularities in export turnover or import volumes which could indicate false value declarations.
Even if individuals looking to hide illicit funds are shifting away from the financial institutions and mechanisms targeted by the new law, as well as coordinated global efforts to reign in black money, the law is worthwhile if only because it pushes those looking to illegally hide funds to look further and further afield. Any measure limiting the ease with which illicit funds may be concealed is a move in the right direction.