Not long ago, Indian residents fancied the idea of opening a foreign bank account [FBA] in the so called tax haven jurisdictions viz., Switzerland, Cayman Islands, Lichtenstein, British Virgin Islands et al. An FBA offered a convenient opportunity to the tax evader transfer his illicit wealth and income generated in India. It was considered to be a status symbol too.
During the last 10 years, such accounts and the money lying therein proliferated as on one hand, the policy and regulatory environment here in India enabled generation of illicit wealth at a rapid pace [shall we say,‘push’] and on the other, the ‘secrecy laws’ in aforementioned jurisdictions provided a shield – or shall we say a China wall that no one could dare break [‘pull’]. And, the result is accumulation of a mountain of illicit funds stashed abroad which according to an estimate is around Rs 1800,000 crores [US$ 300 billion].
Last year, the government had commissioned three premier think tanks viz., National Council of Applied Economic Research [NCAER], National Institute of Public Finance and Policy [NIPFP] and Institute of Financial Management and Research [IFMR]. All three have already submitted their reports. These are currently being examined by Chief Economic Adviser [CEA], Arvind Subramanian and soon, an official figure will be released.
During his election campaign, Modi had targeted the spate of scams under erstwhile UPA and black money stashed abroad which he promised to bring back. To lend weight to his utterances, he opined that the amount would be enough to garner Rs 1500,000/- in to the bank account of every Indian [1800,000 crores/1.25 crores being India’s population]. The interest @ 10% on this amount or Rs 12,500/- per month should be adequate to take care of living all through his life span.
From the date of assuming office, he has gone hammer and tongs effectively countenancing both the ‘push’ and ‘pull’ factors to corner the black money mongers from all sides and yet calibrating all his actions within the four walls of the constitution. On the push side, by making governance policy driven and transparent and simplifying procedures, he has unclogged almost all the ducts that breed corruption and lead to generation of black money. For details, pl read:-
On the pull side, in the budget session of parliament, the government passed the Black Money [Undisclosed Foreign Income and Assets] and Imposition of Tax Act [2015]. Under it, a person having ‘undisclosed’ income and assets in a foreign country/jurisdiction will have to pay in addition to 30% tax, penalty equal to 3 times the tax or 90% [adding to 120% of income/asset] and face prosecution leading to jail which could go up to 10 years. Failure to file returns of foreign income/assets or declare incorrect figures will also attract imprisonment up to 7 years in addition to tax and penalty. The offences cannot be compounded. In other words, should an offender wish to pay money in lieu of imprisonment, that option is not available.
Making a stringent law by itself won’t yield results unless we have information on undisclosed FBAs. In this regard, Team Modi played a proactive role on various international platform such as G-20 and OECD [Organization for Economic Cooperation & Development] besides having deep engagement with concerned countries. As a result, on October 8, 2014, Swiss Federal Council (SFC) adopted definitive negotiation mandates for introducing the new global standard for Automatic Exchange of Information [AEOI]. The new standard provides for exchange of information on bank account balances, interests, dividends and other financial income and sale proceeds to compute possible capital gains. It also enables access to data on beneficial owners of trusts and other financial constructs.
The government will start receiving information under AEOI route under FATCA [Foreign Account Tax Compliance Act] from USA later in 2015. Further under the multilateral agreement, India will start receiving information from 57 jurisdictions under AEOI by 2017 and another 36 jurisdictions by 2018, including those which have beneficial tax regimes. The multilateral agreement is expected to cover all countries in the near future.
In view of aforementioned actions of Modi – government, an FBA which was not just assuring a luxurious/ostentatious lifestyle for tax evaders – albeit at huge cost to the country – but also perceived as a status symbol, has now turned in to a tight noose around their neck. This has caused flutter among real estate developers, jewellers, owners of small and medium enterprises, corporate houses, politicians, media & entertainment industry et al who are all huddled with tax lawyers and charted accountants looking for escape routes.
But, a proactive Modi – dispensation has hardly left any escape route.The finance ministry has released an exhaustive list of ‘Frequently Asked Questions [FAQs]’ which cover all possible situations and the action to be taken by government under each as also the specifics on manner of computation of tax & penalty [including determination of fair value] so that no loophole, ambiguity or scope for misleading/confusing interpretations is left.
Reportedly, some owners of FBA with black money stashed away from India are contemplating change of citizenship to escape getting trapped under the new law. This too is not a practical option as citizenship of a foreign country [in case, a person gets one] will only be prospective whereas, any undisclosed wealth/income coming to the notice of authorities for the past period will make him liable to prosecution under the Act.
However, before the draconian provisions of the Act kick in from assessment year 2016-17, the government has granted a small window of opportunity for 3 months beginning July 1, 2015. Under it, a person can declare his unaccounted wealth/income stashed abroad on-line by filling-in a customized form and pay 30% tax plus 30% penalty. He/she will get time until December 31, 2015 to pay up the amount of tax and penalty. In case, full amount is not paid by this dead line, he/she will be liable for action under the Act. Persons coming clean under this window will be exonerated from prosecution/jail. Moreover, disclosure made under it will not be used for initiating proceedings under FEMA [Foreign Exchange Management Act], PMLA [Prevention of Money Laundering Act], Income Tax Act, Company Act, Wealth Tax Act and Customs Act.
The benefit of aforementioned window shall not be available to persons whose names are already with Indian government as on June 30, 2015 [all those whose names appear in the list procured from HSBC are covered] and who have been served with show cause notices under relevant laws. The intent of government is to offer an ‘olive branch’ only to those who were not under surveillance by authorities and yet willingly have chosen to declare their undisclosed income/asset during July 1 – September 30, 2015. What about persons who declare their un-disclosed income/assets under the three months window and pay 60% [tax plus penalty] but their names are on government’s radar as on June 30, 2015 [which they won’t know]? A double whammy is in store for them as they will not only end up facing prosecution, they won’t also get back the money deposited.
The FAQs also make it abundantly clear that persons whose un-disclosed wealth has come from proceeds of corruption or indulgence in any unlawful activities such as smuggling or drug trafficking etc, will not be eligible for the lesser punishment under the 3 months window. They will be dealt with under the provisions of the Act besides proceedings under relevant law.
The window must not be mistaken as tantamount to grant of immunity [unlike the Voluntary Disclosure of Income Scheme (VDIS) brought in late 90s]; the evader who wants to come clean is not being treated like an ordinary tax payer as he ends up paying in addition to 30% tax, a penalty of 30%. This is also in compliance with the order of Supreme Court which had directed the government not to come up with an immunity scheme in future. For details on VDS, money garnered under it and implications, pl read:-
https://www.uttamgupta.com/wp-content/uploads/2013/05/offenders-received-immunity-from-the-VDIS-bouquet.pdf
Meanwhile, in a cabinet meeting held on April 29, 2015 Modi – government also approved amendments to the extant Prevention of Corruption Act [PCA] [1988] with a view to plug all loopholes which had made it toothless. Its endeavour will be get these amendments passed by the parliament at the earliest possible. For details on flaws in PCA and how Team Modi intends to remove these, pl read:-
In short, by passing the black money law and deft handling of international relations for timely flow of information, Modi – government has dwelt a body blow to all those who stashed illicit funds abroad. It will help bring back the money [how much, we have to wait and watch] but more important, it will act as a strong deterrent to any one daring to get in to such acts in future.For the first ever in the history of free India, an honest citizen and tax payer has an opportunity to smile and feel happy even as dis-honest and corrupt have every reason to be fearful.