[UPSC Interview prep feed Vol.10] Black Money

Guest Post by His Majesty Yogesh Unde!

Topic :  Black Money !

Background -HSBC Black money whistle blower HERVE FALCIANI's revealations in  2008 led to biggest breach in banking security. His information reveals how HSBC helped wealthy clients evade taxes and violate  financial laws. In 2010 the french government gave Delhi a list of more than 600 Indians who held accounts at HSBC in GENEVA. The list DOUBLED in 2014 when fresh investigation of falcani's data led to SWISS leaks which revealed that HSBC in Geneva helped clients in more than 200 countries evade taxes on accounts containing $119 billion. This raises big question mark over BLACK MONEY in INDIA and debate revolving around it.

 DEFINITION -  BLACK MONEY/WEALTH may consist of income generated from legitimate activities or activities which are illegitimate per se like smuggling, illicit trade in banned substances, counterfeit currency,arms trafficking,terrorism and corruption etc.

BLACK MONEY can be defined as assets or resources that have neither been reported to public authorities at the time of generation nor disclosed at any point of time during their possession.

BLACK INCOME as the aggregates of incomes which are taxable but not reported to the tax authorities. They also include legal income that is concealed from public authorities.

  ( A) to evade payment of taxes (income tax,excise tax,sales tax,stamp duty etc)

  (B) to evade payment of other statutory contributions.

   (C) to evade compliance with other laws and administration procedures.

BLACK MONEY GENERATION THROUGH ACTIVITIES 

  1) criminal activities (a) racketeering (b) trafficking in counterfeit and contraband goods (C) smuggling (D) production and trade of narcotics (E) forgery (f) illegal mining (g) illegal felling of forests (h) illicit liquor trade (i) robbery (j) kidnapping (K) human trafficking (l) sexual exploitation and prostitution (m) cheating and financial fraud (n) embezzlement (o) drug money (p) bank frauds 

(q) illegal trade in arms (r) activities under prevention of money laundering act of 2002 (s) the corrupt component of such money could stem from bribery and theft programmes.(t) black marketing of price controlled services (u) altering land use regularising unauthorised construction.

Ways of generation black money.

 (1) land and real estate transactions- under reporting of transaction price in the form of stamp duty and capital gains tax

(2) bullion and jewellery transactions

(3) financial market transactions

(4) public procurement

(5) non profit sector

(6) informal sector and cash economy 

(7) external trade and transfer pricing

The illicit money transferred outside money may come back to INDIA through various methods such as hawala,mispricing,foreign direct investment(FDI) through tax jurisdiction,raising of capital by indian companies through global depository receipts(GDR). INVESTMENT THROUGH innovative derivative instruments are making profits without being subject to taxes.,like Participatory notes may not be adequately covered by regulatory mechanism and their oversight and hence have potential for misuse.

   

According to WORLD BANK DEVELOPMENT RESEARCH GROUP 20.7 % (of GDP) is black money in India in 2012. Estimates of black money stashed abroad according to Swiss external ministry  and Swiss bank  are 9295 crore rupees in year 2010. A total of US $ 213.2 billion shifted outside India from 1948-2008.

INSTITUTIONS TO DEAL WITH BLACK MONEY 

(A) Central board of direct taxes-  a)policy making

                                                 b) assessment

                                                 c) investigation

                                                 d) collection of information

                                                  e)collection of information involving cross border transactions.

(B) Enforcement directorate under FEMA 1999 investigation and prosecution of money laundering act 2002

(C) Financial intelligence unit

(D) Central board of excise and customs and DRI

(E) Central economic intelligence bureau

JOINING THE GLOBAL CRUSADE AGAINST BLACK MONEY 

    (a) India's action through G20 DTAA(direct tax avoidance agreement)

(b) global forum

(c) multilateral convention on mutual administrative assistance in tax matters

(d) financial action task force

(e) united nations convention against corruption

(f) united nations convention against transnational organised crime

(g) international convention for the suppression of the financing of terrorism

(h) united nations convention against illicit traffic in narcotic drugs and psychotropic substances.

CREATING APPROPRIATE LEGISLATIVE FRAMEWORK

 (a) STRENGTHENING direct taxes provisions including those relating to international taxation and transfer pricing.changes in finance act of 2011 to check the menace of black money

(b) creating network of DTAA(DIRECT TAX AVOIDANCE AGREEMENT)AND TIEAS (TAX INFORMATION EXCHANGE AGREEMENT.) as per international standard

(c) prevention of money laundering act 2002

(d) prevention of benami transactions

(e) public procurement bill objective of ensuring transparency,accountability,and probity in the procurment process

(f) prevention of bribery of foriegn public officials bill

(g) lokpal and lokayukta bill

(h) citizens grievance redressal bill the right of citizens for time bound delivery of goods and services and redressal of their grievances bill 2011

(i) judicial standards and accountability bill

(j) whistleblowers bill

(K) direct payment into bank accounts of payees

(l) unique identity (UID) aadhar

(m) amendment t0 the NDPS ACT narcotic drugs and psychotropic substances (AMENDMENT BILL)2011.

 SETTING UP INSTITUTIONS FOR DEALING WITH ILLICIT MONEY

 Particulariy to check cross border flows is setting up institutions to deal with the problem

(a) DIRECTORATE OF CRIMINAL INVESTIGATION (DCI)  the dci is mandated to perform functions in respect of criminal matters having any financial implication punishable as an offence under any direct taxes law.headed by director general of income tax (criminal investigation) and functions under administrative control of CBDT.

(b) CELL FOR EXCHANGE INFORMATION (EOI) works on the mutual cooperation

(c) INCOME TAX OVERSEAS UNITS

(d) Strengthening of investigation division of CBDT

DEVELOPING SYSTEM FOR IMPLEMENTATION

(a) Integrated taxpayer data management system and 360 degree profiling utilized for investigation of tax invasion complaints and for developing cases for search and seizure actions

(b) setting up cyber forensic labs and work stations

(c) the computer assisted investigation tool

(D) goods and services tax network (GSTN) set up a special purpose vehicle for providing shared infrastucture and services for GST

(e)  committee on black money

THE WAY FORWARD

(A) REDUCING DISINCENTIVES AGAINST VOLUNTARY COMPLIANCE

(a) rationalisation of tax rates

(b) reducing transaction costs of compliance and administration

(c) further economic liberalisation

 (B) Reforms in vulnerable sectors of the economy

(1)Financial sector fine tuning of financial regulation,oversight mechanism,vigilance machinery

(2) real estate

 (3)cash economy -regulation of the possession and transaction of cash above a particular threshold limit

(4) mining and allocation of proper rights for natural resources-transparency,public accountability,appropriate price discovery mechanism

(5) equity trading KYC norms

(6) misuse of corporate structure for generation of black money

(7) non profit organisation and cooperative sector -create database,apply KYC norms

(C) CREATION OF EFFECTIVE CREDIBLE DETERRENCE 

  (a) important role of monitoring agencies

(b) strategy to strengthen direct tax administration

(c) strengthening of the prosecution mechanism

(d) enhance exchange of information 

(e) income tax overseas units -facilitate international cooperation in areas of exchange of information,transfer pricing,and taxation of cross border transactions.

(f) international taxation on transfer pricing

(g) effective curbing of structuring through tax heavens

(h) strengthening of indirect tax administration

(i) strengthening financial intelligence unit

REPATRIATION OF BLACK MONEY STASHED ABROAD

  (a) United nations convention against corruption -ratified in 2012 corruption money can be seized and repatriated

(b) DTAA direct tax avoidance agreement

(c) Multilateral convention on mutual administrative assistance in tax matters -ratified in 2012

(d) stolen assets recovery is a partnership between the world bank group and UNODC (UNITED nations office on drugs and crime)

(e) TIEA tax information exchange agreement

(f) mutual legal assistance treaty(MLAT)