Expert Take on New Black Money Regulations

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PRESENTATION ON NEW BLACK MONEY REGULATIONS

Budget 2015

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“Tracking down and bringing back wealth which

legitimately belongs to the country is our abiding

commitment to the country”

- FM in his budget speech

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KEY HAPPENINGS

2009: Germany hands over list of Indian account holders in LGT

Bank, Liechtenstein, a European principality

2011: France hands over list of 782 Indian citizens who allegedly

hold HSBC accounts in Geneva

May 2014: New NDA government sets up a high-powered Special

Investigative team (SIT) headed by retired Supreme Court (SC)

Government submits list of 627 foreign account holders’ names to

Supreme Court

Feb 2015: Revenue department completed assessment for over

350 foreign accounts out of which prosecution has been launched

against 60 of such account holders.

Budget 2015: Two independent laws are proposed to deal with

offshore accounted money and dubious domestic transactions,

prescribing prosecution upto 10 years with for delinquent

taxpayers.

1256

million

0.043

million

Populationonly 42,800 persons

having income

exceeding Rs 1 crore

(1.22% of the

taxpayers)

35

million

Tax payers – a

meagre 2.9%

of the

population

$ 2

trillion

dollars

Industry

estimate of

black money

$ 1.7

Trillion

dollars

Size of the

Indian

economy

$ 440

Billion

Estimate by

GFI of black

money abroad

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FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)

Credit for the first and so far the most successful breakthrough in identifying and prosecuting

illegal Swiss bank account holders goes to the US IRS.

FATCA compels foreign governments and banks to report bank accounts of entities in which

US taxpayers hold a stake

FATCA has fathered a growing global consensus on attacking the offshoring of illegal wealth.

So for more than 80 nations, including well known tax havens of Bahamas and Switzerland,

and as well as 77,000 financial institutions have come on board.

Mostly because they cannot afford not to as the US government will levy a 30% tax on

everything flowing from US to a non compliant institution.

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BEFORE BUDGET 2015

Over 500 TIEA signed all over the world

India has over 15 effective TIEA

India is in negotiations with over 75 countries to broaden the scope of Article

containing Exchange of information to specifically allow for exchange of banking

information and information without domestic interest.

India has signed TIEAs with the Bahamas, Bermuda, the British Virgin Islands, the

Isle of Man, the Cayman Islands, Jersey, Macau, Liberia, Argentina, Guernsey,

Bahrain and Monaco and Gibraltar.

Tax Information Exchange Agreement (TIEA)

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BEFORE BUDGET 2015

Mandatory disclosure by individuals having foreign assets w.e.f AY 2012-13

In case of Partnership/Proprietorship having total income of more than 25 Lakhs, the

taxpayer is required to disclose his assets (w.e.f AY 2013-14)

Introduction of Section 94A in finance Act 2011 which empowered the government

to notify any country which does not help India in Tax Information Exchange as a

Notified jurisdictional Area u/s 94A (Currently only Cyprus is notified)

The Section was introduced to discourage transactions with countries who do not

have an effective tax information exchange systems with India

Section 94A is also referred to as ‘Tool Box of Counter Measure”

Income-tax Return

Section 94A

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BEFORE BUDGET 2015

Under a global framework, more than 40 jurisdictions including India had agreed

to become early adapters of an automatic exchange of information prepared by

OECD

The early adopters plan to collect data from 2016 and exchange information for

the first time by end of 2017

Details that would be shared include account number, name, address and date of

birth, tax identification number, interest and dividends, receipts from certain

insurance policies, credit balances on accounts, as also proceeds from the sale of

financial assets.

This mechanism would help tax authorities to have a strong ground while seeking

to bring back and tax the funds stashed overseas by its citizens.

Automatic Information exchange – A long term solution

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BUDGET 2015

Following are certain measures proposed to be adopted in the New Black money code in relation to

foreign assets:

Concealment of income and assets and evasion of tax: Imprisonment upto 10 years. Further,

• this offence will be made non-compoundable;• the offenders will not be permitted to approach the Settlement Commission; and• penalty for such concealment of income and assets at the rate of 300% of tax shall be

levied.

Non filing of return or filing of return with inadequate disclosure : Imprisonment up to 7 years

Income in relation to any undisclosed asset or undisclosed income: Taxable at the maximum marginal rate. Also No exemptions or deductions will be allowed

Mandatory filing of return for Beneficial owner or beneficiary of foreign assets even if no taxable Income

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BUDGET 2015

Abettors of the above offences (Individuals/entities/financial institutions) : will be liable for

prosecution and penalty

Date of Opening of foreign account : To be specified mandatorily by the assessee in his ITR

Predicate Offence: The offence of concealment of income or evasion of tax in relation to a foreign asset

will be made a predicate offence under the Prevention of Money-laundering Act, 2002 (PMLA). This

provision would enable the enforcement agencies to attach and confiscate unaccounted assets held abroad

and launch prosecution against persons indulging in laundering of black money

Proceeds of crime: The definition of „proceeds of crime‟ under PMLA is being amended to enable

attachment and confiscation of equivalent asset in India where the asset located abroad cannot be

forfeited.

The Foreign Exchange Management Act, 1999 (FEMA) is also being amended: if any foreign

exchange, foreign security or any immovable property situated outside India is held in contravention of the

provisions of this Act, then action may be taken for seizure and eventual confiscation of assets of

equivalent value situated in India. These contraventions are also being made liable for levy of penalty and

prosecution with punishment of imprisonment up to five years

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ANY WAY OUT?

Government has categorically ruled out any chance of amnesty scheme for black money

holders

However, they will offer a „window‟ to Indians holding black money in foreign accounts.

Government may give last chance to disclose their bank accounts or wealth. Pay their

taxes and avoid prosecution

Any Chance of Amnesty Scheme

New Black money laws give unbridled power to agencies agencies

Is the New Black money Law simply the re-introduction of FERA wherein a huge amount

of power be enforced in the hands of ED

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SAFEGUARDS

Criteria for scrutiny

Safeguards to be in place to protect students or professionals going for a short stint

abroad

Secrecy of name/data in the course of normal assessment/scrutiny

Fear of misuse / fishing expedition / arbitrary use of powers

Internal checks and balances required

Legitimate right to non intrusive surveillance and privacy to be protected

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DOMESTIC BLACK MONEY

A new and more comprehensive Benami Transactions (Prohibition) Bill will be introduced

in the current session of the Parliament

Quoting of PAN to be mandatory for any purchase or sale exceeding the value of Rs 1

lakh

CBDT and CBEC will leverage technology and have access to each others data base

Steps to be taken to incentivize use of both credit and debit cards

Amendment to Section 269SS / 269TT of the Income-tax Act. The same will prohibit

“acceptance or payment” and repayment of an advance of Rs 20,000 or more in cash for

purchase of immovable property

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Budget 2015 – Relief to Foreign Investors

FDI into India rose by about 31 per cent to USD 28,784 million in the calendar year 2014 as compared to 2013

35% of FDI from Mauritius and

13% from Singapore

18% of the total FDI towards Service Sector and

10% towards Infrastructure Sector

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Presently, under section 195 of the Act, any person making a taxable payment to aNR is liable to withhold tax at the appropriate rates and furnish certain informationto the Tax Authority on such payments. It was understood to apply only to paymentof amounts chargeable to tax in India.

It has been proposed to clarify that the payer is required to furnish prescribedinformation on all payments to NR irrespective of whether or not such paymentsare chargeable to tax in India. Government wishes to track the payments on whichthere is a failure to withhold taxes and to ensure tax withholding is done atappropriate rates


Would this bring practical difficulties?

Furnishing information on payments to NR

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Indian Courts* have traditionally held that no MAT (u/s115JB) is

applicable on non-residents not having a permanent establishment

in India, since they do not maintain their books.

However, certain decisions by the Authority for Advance Rulings

(Castleton Investment Ltd., [2012] 348 ITR 537 (AAR)) levy MAT on

FPI even where their long term capital gains are not taxable in India.

Budget 2014 confirmed that the income of FPIs from dealing in permitted securities will always be treated as ‘capital gains’ and not ‘business income. CBDT vide notification 9/2014 notified that FPI be treated as FII

Profits corresponding to FIIs income from capital gains on transactions in securities that are liable to tax at a lower rate/nil rate shall not be subject to MAT

*Bank of Tokyo Mitsubishi UFJ Ltd. (ITA 5364/2010 and 5104/2011) – Delhi ITAT

Timken Co. (AAR NO. 836 OF 2009) Praxair Pacific Ltd (AAR NO. 855 OF 2009)


MAT on FII

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Though FPIs/FIIs have been removed from MAT implications, no such relief has beenconsidered for offshore funds that do not fall within the FPI/FII category. WhetherVenture Capital Funds (‘VCF’) [exempt from tax u/s 10(23F) read with 115U] and foreigncompanies (not having a PE and not required to maintain books) not falling within thepurview of FPIs will now be at the risk of scrutiny by the Revenue in respect of MATliability? - Revenue authorities may seek to levy MAT for all other non-resident investors.

Amendment is only on capital gains, which implies that MAT is applicable to all othercases. Whether interest income on government securities and corporate bonds whichare currently taxed at only five per cent, be liable to MAT @ 20 per cent?

The amendment is to take effect from April 1, 2015, which means investors exposed toMAT levy on all their income for preceding periods. Meaning thereby that the noticesissued till date would remain alive. Amendment should have also addressed the existingnotices


Foreign Investors MAT wishes remains partly answered

Is significant litigation on its way?

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Under section 9(1)(i) of the Income-tax Act, 1961 (‘the Act’), income of a NR is taxable inIndia if it arises, inter alia, through a business connection in India

Similarly, under Double Taxation Avoidance Agreements (DTAAs), the source countryassumes taxation rights on certain incomes if the non-resident has a PermanentEstablishment (PE) in that country

Presence of fund managers or investment advisors in India may, in certain scenarios, beviewed as a PE of the offshore fund, thereby exposing the fund to tax in India

The fund managers of offshore India-centric funds which are housed outside the countryso as to showcase that the investment decisions are not being taken from India and,therefore, the offshore fund does not have a permanent establishment in India, can nowsafely relocate to India.

In order to mitigate the PE risk and boost India's fund management industry, Budget 2015has clarified that an India based fund manager or investment advisor shall not be treatedas a PE


Taxation of offshore funds

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Offshore fund and the fund manager must satisfy certain conditions to be eligible for theproposed regime, such as:

(i) the fund is not a person resident in India;

(ii) the fund is a resident of a country or a specified territory with which India has treaty;

(iii) the aggregate investment in the fund, by Indian resident does not exceed five percentof the corpus of the fund;

(iv) the fund is subject to investor protection regulations in the country where it is aresident;

(v) the fund has a minimum of twenty five members who are, directly or indirectly, notconnected persons;

(vi) Participation interest of any member shall not exceed ten percent;

(vii) the aggregate participation interest of ten or less members in the fund, shall be lessthan fifty percent;

(viii)the investment by the fund in an entity shall not exceed twenty percent of the corpusof the fund;

(ix) no investment shall be made by the fund in its associate entity;

(x) the monthly average of the corpus of the fund shall not be less than one hundredcrore rupees;


Taxation of offshore funds

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Relief was though available to resident taxpayers in respect of taxes paid outside India, however no mechanism is presently provided under the Act.

Budget 2015 has empowered CBDT to make rules to provide the procedure thereof.


Budget 2015 has done away with the distinction between different types of foreign investments, especially between Foreign Portfolio Investments (FPI) and Foreign Direct Investments (FDI) , and replace them with composite caps .

Current limits - For eg.

Private banking – 74% (including 49% FII/FPI)

Commodity and power exchanges – 49% (26% FDI and 23% FII/FPI)

FDI and FPI

Foreign Tax Credit

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ANNEXURE

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TAX INFORMATION EXCHANGE AGREEMENT

- Information must be relevant to the administration and enforcement of the domestic laws of the

Contracting Parties concerning taxes covered by TIEA

- The requesting Party has to provide minimum details (like identity of person under examination or

investigation; period for which information is requested; tax purpose for which information is sought etc.)

to the requested Party in order to justify the relevance of the information requested.

- The requested Party shall use its information gathering measures to obtain the requested information

even though that Party may not need such information for its own tax purposes.

- The requested Party may allow representatives of the requesting Party to enter the territory of the

requested Party to interview individuals and examine records with the prior written consent of the

individuals or other persons concerned

- The requested Party may decline to assist in those cases wherein the request has not been made in

conformity with TIEA or where the requesting Party has not pursued all means available in its own

territory to obtain the information (except where recourse to such means would give rise to

disproportionate difficulty) or where disclosure of the information would be contrary to public policy of the

requested Party

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TAX INFORMATION EXCHANGE AGREEMENT

- The requested Party shall forward the requested information as promptly as possible to the requesting

Party. To ensure a prompt response, the requested Party shall be required to respond within specified

time period mentioned in TIEA to the requesting Party.

- Information received under TIEA by the Contracting Party is to be treated as confidential and can be

disclosed only to persons or authorities (including courts and administrative bodies) in the jurisdiction of

the Contracting Party concerned with the assessment or collection etc. of the taxes covered by TIEA.

- TIEA also provides for disclosure of information to any other person or entity or authority or any other

jurisdiction with the written consent of the competent authority of the requested Party.

- Ordinary costs incurred in providing assistance shall be borne by the requested Party. Extraordinary

costs incurred in providing assistance (including costs of engaging external advisors in connection with

litigation or otherwise necessary to comply with the request) shall, if they exceed USD 500, be borne by

the requesting Party.

- There is a specific provision for providing banking and ownership information

- TIEA also allows exchange of past information in criminal tax matters.

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DEFINATIONS

Every Scheduled Offence is a Predicate Offence. The Scheduled Offence is called Predicate Offence

and the occurrence of the same is a pre requisite for initiating investigation into the offence of money

laundering. (FAQ of PMLA)

Predicate Offences are crimes underlying money laundering or terrorist finance activity. Initially,

predicate offences were categorized under drug-related offences. Drug-related offences are considered

as the primary predicate offences. However, the legislature has broadened the definition of predicate

offences to include any serious crime. (Legal definition)

“Proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a

result of criminal activity relating to a scheduled offence or the value of any such property

What is Predicate Offence

What is Proceeds of Crime under PMLA

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Expert Take on New Black Money Regulations

Economy & Finance

Transcript of Expert Take on New Black Money Regulations