Saturday, March 14, 2015

BLACK MONEY LAW – A NEED FOR SERIOUS DEBATE

The initiatives proposed by Finance Minister in his budget speech on February 28, 2016 to effectively
deal with the problem of black money, which eats into vitals of our society and economy, are highly
commendable. The measures initiated by the government in the last nine months to bring back the
black money in Swiss Banks has already brought very fruitful results and the names and the details of possible offenders have already been disclosed to Special Investigation Team set up by honorable Supreme Court.
The entire country including the common man heartily supports the retrieval of illegal black money kept outside India. The main focus of the government as well as the public is to ensure that money collected from corruption, crime, drug trafficking, terrorism and arms dealing are all accessed effectively with the help and support of foreign government. Fortunately, Uncle Sam (President of United States of America) is also actively supporting this move in his country's own interest and most of the international jurisdictions have already signed a treaty with government in this regards for exchange of all necessary information.

Fear Psychosis in Businesses
The Finance Minister has proposed new law on black money to be presented with parliament shortly in respect of concealment of foreign assets and evasion of tax in relation to foreign assets. The objective of the law is appreciated; however the proposed law has already brought in a big fear psychosis among the genuine businessmen and corporates in India as well as outside India. It is important for the government to ensure that another draconian law is not brought in, in a spree, to curb black money and concealment of foreign assets of money launderers. The manner in which law is proposed by Finance Minister, it may severely impact the genuine business activities, domestic as well as international investments by Indians and Foreign Direct Investments by foreigners in India.

Sweeping Powers:
The proposed law will give sweeping powers to the government officials:

  • to initiate prosecution with punishment of rigorous imprisonment up to 10 years.
  • the offense being made non compoundable
  • proposal to withdraw powers of Settlement Commission
  • penalty equivalent to 300% of the tax levied
  • even non-filing of return or filing of return with inadequate disclosures will be liable for imprisonment up to 7 years.
  • Proposal to equate offence of concealment of income or evasion of tax as money laundering

In respect of non-compliance of Foreign Exchange Management Act, besides the above sweeping powers, the power including imprisonment, of attachment and confiscation of assets in India or abroad are also proposed. The power corrupts and the absolute power corrupts absolutely.

The proposed law may be as draconian as possible for the offenders accumulating assets and black money arising out of corruption, drug trafficking, anti-national activities, heinous crimes, terrorism and illegal arms dealing.

However, in case same or similar provisions are extended to business transactions, investments, imports and exports, corporate acquisitions, creation of investment funds and other similar activities undertaken by the resident Indians and Corporate Indians, a very serious risk may arise of misuse of such severe powers in the hands of government.

It may be noted that the current law gives freedom to invest outside India, to have international bank accounts, create foreign assets and large business empires outside India. The bill should not cover the permitted genuine business activity and need not be particular about technical procedures or technical breaches in the normal course of business.

The current government and most of its leaders are highly honest and dedicated to the national cause but how will they stop or curb heavy dose of corruption, severe harassment, arrest, threat to arrest and all kind of similar misuses by officials and future Governments with political vendetta. The Foreign Exchange Regulation Act (FERA) and Conservation of Foreign Exchange and Prevention of Smuggling Activities (COFEPOSA) provided similar powers as are being proposed in the aforesaid draconian law. The Indian democracy and Indian businesses will not tolerate a similar dose of absolute powers delegated to motivated or over-enthusiastic officials of the tax department, Enforcement Directorate, Central Bureau of Investigation and various other enforcement agencies.

The proposed law should not in any manner adversely impact the economic and business atmosphere in the country so as to affect genuine businesses. It is rather important to decontrol most of the capital account transactions to bring in more growth and investment including growth of large businesses within India and outside India as well as international investments in India.

The following important controls and precautions need to be built in the proposed law:-
  • The proposed law should apply only to black money arising out of corruption, crime, drug trafficking, terrorism and arms dealing, currently defined as money laundering in terms of Money Laundering Act, 2002.
  • The foreign business assets and international business transactions should not be in the scope of proposed law.
  • The contravention of FEMA is currently liable for penalty up to 3 times of the amount involved. To provide for powers of confiscation and attachment beside imprisonment will completely reverse the decision taken by the government while replacing FEMA with FERA. RBI may give a special window to compound FEMA non-compliance in genuine cases.
  • We may suggest a one-time Amnesty, except to money launderers, to clean the stable, provided the money declared is brought in and after collection of applicable tax, is mainly utilized for investment in the growth of agriculture, industry & business as well as in the development of infrastructure in India
  • Even the proposed change in definition of "residential status" for foreign company in the Income Tax Law needs to be modified.
The BJP government had committed to the nation that it will bring back the illicit Black Money held in Swiss Accounts or in other countries through their election manifesto. Due to political pressure as the ruling party, it is important for PM to remember that they also made following promises:
  • Non adversarial and conducive tax environment
  • Conducive and friendly business environment
  • Eradication of harassment and corruption in tax administration
  • Eradication of tax terrorism
  • To address uncertainty and anxiety among business class
  • Simpler and small Direct Tax Laws
  • Stable and reliable tax regime
  • Improvement of investment climate with the target of ease of doing business in India.
The government needs to be very careful and balance the aforesaid promises on one hand and curbing of black money on the other. The current government is highly matured and needs to appreciate that a powerful section of bureaucracy which has been highly corrupt wishes to take the party in power into a wrong direction so that all the good initiatives taken by the government are destabilized.

The curbing of Black money is important but not at the cost of curbing Genuine business activity. It is important to provide more flexibility in foreign transactions, business regulations and tax laws to Indian and foreign businesses, for Ease of Doing Business and Make in India project to be a reality.

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