India’s battle against black money is still a work in progress. A new book comprising selected essays by former finance minister Arun Jaitley
details the many decisive measures taken by the NDA govt
to prevent and combat corruption
The NDA’s campaign against black money is just one of many measures to eliminate corruption and tax evasion in order to clean up the system both at home and globally through international cooperation. Compare this with the Congress Party and the National Herald scandal in which they have acquired properties worth a huge amount without spending anything and used tax-exempted income for a non-exempted purpose or the chit fund fraud in West Bengal. Prime Minister Modi’s five-year tenure will be regarded by future political historians as a turning point where a movement to free India from corruption began.
The world is increasingly moving towards a more structured and organised struggle against illegal money parked in tax havens or even otherwise transacted at foreign soil. Originally the tax havens were completely non-cooperative. However, international pressure has compelled some of them to relax the rigidity against non-disclosure. Almost all countries which entered into Double Taxation Avoidance Treaties or have a domestic legislation, as in the case of the US, that has an extra-territorial application, insist that information parted to the receiving state would be subject to confidentiality clauses. The confidentiality clauses make it incumbent that disclosure would be made only after prosecution is filed before a charging court. Thus, the issue is not whether, but when disclosure can be made. The debate is not between disclosure and non-disclosure of confidential information. It is between unauthorised disclosure in violation of tax treaties and disclosure as per tax treaties. An unauthorised disclosure in violation of tax treaties entails that the disclosure is made for collateral purposes. It is usually not accompanied by any evidence or proof. But when a disclosure is made in pursuance of a charge sheet in a court of law where a criminal prosecution is filed, it would certainly be a disclosure substantiated by adequate proof and evidence.
A disclosure in violation of tax treaties helps the account holder. The reciprocating state would treat this as a violation of a tax treaty and refuse to provide any evidence in support of the unauthorised account. The holder of the unauthorised account in the absence of any proof and confirmation from the reciprocating state would get the benefit in any investigation or prosecution and then claim that “I stand vindicated”. In fact, a premature disclosure would additionally alert the account holder to prepare some documentation or a sham defence. It may even enable him to destroy evidence.
India has to take a conscious call. Does it want to be a part of the global coalition which is moving in the direction of automatic sharing of information or not? Does it ensure all information is supported by substantial evidence and proof or only wishes to remain restricted to sloganeering? In the recent meeting of about fifty countries in Berlin where automatic sharing of information was proposed, India could not participate since a prevalent view is that confidentiality clauses are unconstitutional under Indian law. This view requires reconsideration. An automatic exchange of information would relate both to authorised and unauthorised movement of money. Why should any information with regard to authorised movement of money be made public? Why should information even in relation of unauthorised movement of money be made public only for political or collateral purposes? Why should the account holder be alerted in advance? It should be put to an authorised use with collection of evidence and filing of prosecution.
The US has legislated the Foreign Account Tax Compliance Act, 2010 (FATCA). The FATCA contains a confidentiality clause. It makes it mandatory for foreign financial institutions (FFIs) to register with the appropriate authority and exchange information. The foreign financial institutions are required to enter into agreement with the US Internal Revenue Service. Alternatively, foreign governments can sign agreements with the US government — the mandatory exchange of information subject to confidentiality clause being necessary. FATCA mandates the deduction and withholding of tax equal to 30 per cent on a US source payment to recalcitrant FIIs or FFIs in non-compliant countries which do not meet the requirements of FATCA. Such 30 per cent withholding will also be imposed by other FATCA compliant countries against non-compliant countries. The consequences of not signing the agreement with the US under FATCA would be disastrous. It will negate the efforts being undertaken by our government to revive the Indian economy.
The Reserve Bank of India has already informed the government of India about the serious and adverse consequences of non-compliance of FATCA by India. Several countries have already subscribed to FATCA.
An unauthorised disclosure of information is fraught with both investigation and economic consequences. They can sabotage the investigation. They can attract sanctions in the form of withholding taxes. It is obvious that in a choice between unauthorised disclosure and disclosure as per treaties, the latter is both a fair and beneficial proposition.
The black money menace
No society can indefinitely sustain a system where income earners consider tax evasion to be a way of life. Regrettably, our high taxation regime in the past eventually ended up encouraging tax evasion. When states tax their people reasonably, they can persuade them to honestly declare their incomes. The early decades after Independence witnessed India with high taxation rates, prompting people to evade. Th e capacity of the state to detect evasion was less than adequate. Over the years, India has slowly started moving towards moderate rates of taxation. It has been a conscious strategy of the NDA government to put more money in the pockets of middle- and low-income groups by raising exemption limits and incentivising savings through fiscal policy. This will encourage consumption and bring more money into the system. Consumption increases the volumes of indirect taxation. To make India a more investment friendly destination, I had announced in the 2015 Budget that the rate of corporate tax would be brought down to 25 per cent over the next four years and most exemptions, other than those which incentivise savings, would eventually be phased out. The present government under the leadership of Prime Minister Shri Narendra Modi stands by this commitment.
How the campaign played out
The government has formulated a conscious strategy to deal with the menace of black money. At the very first meeting of the Union cabinet, after the swearing in of the government, we implemented the direction of the Supreme Court to constitute an investigation team headed by two retired judges of the Supreme Court who would monitor the entire efforts against black money. The UPA government had tried to evade the Supreme Court direction on one pretext or the other for over three years. The government swung into action and accelerated all the income tax assessments against those with regard to whom information about holding illegal money abroad in Liechtenstein and in the HSBC bank at Geneva, were available. Most assessments have been completed and wherever illegalities are being found, criminal prosecutions have been launched against beneficiaries of these bank accounts.
A total peak balance of about Rs 6,500 crore in these accounts has been assessed. The government, thereafter, proposed a law for imposition of taxation on undisclosed assets held outside the country. Since this tax was being imposed for the first time, a ninety-day compliance window was offered to those wanting to disclose their unlawful assets. The compliance window ended on 30 September 2015. A total tax at the rate of 30 per cent and penalty at the rate of 30 per cent has to be paid by the declarants before 31 December 2015. Those who chose to declare between this period would not be prosecuted under the new black money law. Six hundred and thirty-eight persons have declared their income amounting to Rs 3,770 crore.
For those who have undisclosed foreign assets but have failed to file such a declaration will now be subjected to penal provisions of this law. They will be liable to pay 30 per cent tax and a penalty of 90 per cent, thus leading to confiscation of the assets plus more. In addition, they will be liable to prosecution where they can be sentenced up to ten years. This law will create a deterrent iagainst the flight of capital from India.
The assessed income of Rs 6500 crore in HSBC and the Rs 3770 crore declared during the compliance window should not be treated as income under any immunity scheme. The comparison of these amounts with amnesty schemes relating to domestic black money is ill-conceived. Th e campaign against domestic black money has to be separately dealt with for which government is independently taking steps.
In order to encourage international cooperation in the matters of tax evasion, the government has taken a series of steps. The prime minister took the initiative at the G-20 meeting in order to bring about international cooperation in tackling unlawful assets held by the residents of one country on foreign soil. The G-20 initiative is intended to lift the veil of secrecy in banking transactions and in real time inform domestic taxation authorities about transactions of their citizens internationally.
The government has signed an understanding with the US under FATCA wherein the United States and India would disclose to each other any real-time transaction in accounts with financial institutions, by its citizens in foreign territories. This cooperation would also extend to all those countries which would become signatories to global standards on Automatic Exchange of Information being developed under the mandate of G-20. The revenue secretary led a team of Indian officials and has held extensive discussions with Swiss authorities. Discussions have also been held at the ministerial level. Switzerland has agreed to provide India with proof relating to several HSBC accounts where India can give some evidence over and above the stolen data, which was delivered to India through France.
It is expected that over the next two years this international cooperation will be worked out and information with regard to illegal assets held abroad, subject to certain conditions, would be available to each of the demanding nations. Thus, those with illegal assets abroad, who have failed to make declaration, would now stand the risk of information relating to them eventually reaching the Indian taxation authorities.
Domestic black money
The bulk of black money is still within India. We, thus, need a change in national attitude where plastic currency becomes the norm and cash an exception. Being seized of this problem, the government has been working with various authorities in order to incentivise this change. Th e opening of a large number of payment gateways, internet banking, payment banks and the emerging reality of e-commerce will prompt the use of banking transactions and plastic money significantly. The JAM Trinity and the Direct Benefit Transfer of subsidies to the accounts of beneficiaries of various government schemes will also be a step ahead in this direction. Each of the 180 million beneficiaries of the Jan Dhan accounts has been provided with RuPay cards, which will encourage them to use plastic currency and get familiarised with it.
The MUDRA Yojana, over the next few years, has a target of sixty million people (which means six crore families out of 25 crore families in India) to become entrepreneurs. Loans being made available to them by the banks can only be withdrawn from the ATMs by use of MUDRA credit cards which are being provided to them. More and more of their transactions will be through plastic currency or through the banking channel.
The government is at an advanced stage in considering the requirement of furnishing PAN card details if cash transactions beyond a certain limit are undertaken. The monitoring regime of income tax has been strengthened and its capacity to access information and apply technology-driven analytical tools to expose evasion, has been enhanced. Its ability to detect large cash withdrawals, or large cash transactions which enter the system, is being strengthened. The GST regime, once introduced, will also be a landmark step in this direction. Thus, for commodities like gold where the initial purchase by the exporter is after the payment of custom duty, the subsequent transactions which are mostly in cash, can easily be found out.
The government’s policy is rationalisation of tax structures, placing more money in the hands of small earners, encouraging the use of plastic money and creating deterrence for those who continue to use unaccounted money.
A new Idea:Selected writings 2014-19
Excerpted with permission from Juggernaut