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Overview of black money - Tax and Regulatory Aspects

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“Tracking down and bringing back wealth whichlegitimately belongs to the country is our abiding commitment to the country”

- FM in his budget speech

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Contents

Snapshot of Black Money

Historical Background

Amendments by Finance Act 2015

Regulatory provisions on Foreign Assets

Build up to the Bill

What is India doing about it – The Black Money Bill

Safeguards

Automatic Information exchange – A long term solution

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Snapshot of Black Money

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 dollarsIndustry

estimate of black money

$ 1.7 Trillion dollarsSize of the

Indian economy

$ 440 Billion

Estimate by GFI of

black money abroad

LGT Bank of Liechtenstein supplied names of 18 Indian account holders

Writ Petition was filed in the SC in 2009 seeking directions to help bring back black money stashed abroad

The SC on 4 July 2011, ordered the appointment of a SIT. In 2014 NDA government sets up a SIT headed by retired SC justice

In 2011, Indian government received the names of 782 Indians having accounts in HSBC Geneva Branch

Government of India submitted the names of 627 people in SC in a sealed envelope on 29 October 2014

Finance Act, 2015 provides that two independent laws be formed to deal with offshore accounted money and dubious domestic transactions

The Black Money Bill awaits the President’s accent and domestic black money bill is on its way

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Historical Background

Income-tax Return

Individuals who are ordinarily resident in India having taxable income mandatorily

required to disclose their foreign assets w.e.f. AY 2012-13:

Bank account details such as name and address of bank, peak balance, name of

the holder, country name and code

Financial interest in any entity, name and address of entity

Immovable property, address , country name

Any other asset

Details of accounts wherein the taxpayer has signing authority

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)

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Historical BackgroundTax Information Exchange Agreement - TIEA

• Over 500 TIEA signed all over the world and 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

• 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.

Why is TIEA toothless?

• Domestic bank secrecy laws trump these agreements

• Havens are exempt from supplying information they do not collect and they often collect little

• Severe procedural restrictions are imposed to preclude "fishing expeditions" — i.e., broad, general inquiries and automatic information sharing is expressly excluded

• The result is a slow and unwieldy process that precludes serious real-time help to tax authorities

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Historical BackgroundSection 94A

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 (“NJA”) u/s 94A

In November 2013, Indian government notified Cyprus as a NJA

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

effective tax information exchange systems with India

Implications of being notified as NJA

Applicability of TP provisions;

Non-Deduction of expenses in relation to transaction with a NJA entity unless

authorization in Form 10FC is furnished

Tax withholding at 30% or rates prescribed under the Income Tax Act

Any sum received by an Indian resident from an NJA entity shall be deemed to be

his income unless source is explained

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Historical BackgroundForeign 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.

Indian Government to sign FATCA with USA to be effective September, 2015 which is expected to result in additional data flow

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Amendments by Finance Act 2015

Finance Act, 2015 provides that ROR, is mandatorily required to file the tax return if he:

o holds, as a beneficial owner or otherwise, any asset (including any financial interest in any

entity) located outside India or has signing authority in any account located outside India; or

o is a beneficiary of any asset (including any financial interest in any entity) located outside India

ROR having foreign assets (in their own name or as beneficiary) mandatorily required to filed ITR irrespective of having any taxable income. However, ITR will not be

mandatory for a beneficiary if income arising from such asset is includible in the income of the beneficial owner of such asset

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Regulatory provisions on Foreign Assets

India has vigilantly opened up its capital Account since the early 1990’s as policymakers realized that domestic savings and taxes are inadequate to cater country’s huge investment needs. India too is persistently poignant on the path of liberalization, by opening up its markets and loosening its controls over economic and financial matters.

Capital Account Convertibility

India has moved to current and capital account convertibility Currently convertibility of capital for residents (both individuals as well as companies) continue

to be subject to certain capital controls. However, as part of the liberalization process the government has over the years been relaxing these controls.

Liberalized Remittance Scheme

RBI had announced a Liberalized Remittance Scheme (LRS) in 2004 for simplification and liberalization of the foreign exchange facilities available to resident individuals. Under the LRS, all resident individuals, including minors, are allowed to freely remit up to USD 125,000* per financial year (April – March) for any permissible current or capital account transaction or a combination of both.

* Sixth Bi-Monthly Monetary Policy Statement, 2014-15 proposed the limit to be doubled to USD 250,000

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Regulatory provisions on Foreign Assets

Indian Companies

India Company can make direct investment in a JV/WOS as per the Overseas Direct Investment (ODI)

Guidelines.

Thus an Indian Company can invest in Shares*; Loan & advances*; Land**; and Furniture Fixture/office

equipments***

*As per the ODI guidelines, the overall limit of ODI is 400% of the net worth as per the last audited balance sheet.

** Indian resident may acquire immovable property outside India, by way of gift or inheritance or by way of purchase out of foreign

exchange held in Resident Foreign Currency (RFC) account

***Indian Company can open and maintain its office outside India for conducting normal business activities of the Indian entity

What foreign assets can be held by an Indian Resident in accordance

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Regulatory provisions on Foreign Assets

Individuals

Indian resident may acquire immovable property outside India, by way of gift or inheritance or by

way of purchase out of foreign exchange held in Resident Foreign Currency (RFC) account

Any resident individual who is holding assets abroad acquired from money remitted under LRS for

the permitted transaction

A resident person who continues to hold assets abroad which were acquired when non-resident

Inheritance of foreign asset by Indian resident from non-resident relative

What foreign assets can be held by an Indian Resident in accordance

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Build up to the Black Money Bill

• A meeting was held in France and Switzerland on October 2014, which took place in a

positive atmosphere but ended with a note that the Indian government would have to first provide

evidence "independent" of the HSBC list.

• India failed to attend an OECD meeting in Berlin held on October 30, 2014 where a multilateral

(competent authority) agreement requiring a commitment to follow international standards of

confidentiality for information received relating to black money was signed.

• During the G-20 Summit Meeting held on November 15, 2014, In Australia, the PM urged every

jurisdiction, especially tax havens, to provide information for tax purposes in accordance with treaty

obligations and India committed itself to signing of CAA which is a prelude to an Annual automatic

exchange of information between governments.

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What is India doing – The Black Money Bill

The Black Money (Undisclosed Foreign Income And Assets) And Imposition Of Tax Bill, 2015, popularly called the black money bill (‘UFIA’) shall be applicable from April 1, 2016

TAX PUNISH PREVENT

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What is India doing – The Black Money Bill

Prevention of Money Laundering Act (PMLA), 2002 to include offence of tax evasion under the proposed legislation as a scheduled offence under PMLA.

Undisclosed foreign income and assets to be treated as “proceeds of crime”

Enforcement agencies can attach and confiscate unaccounted assets held abroad and launch prosecution against persons indulging in laundering of black money.

Premier investigating agencies like CBI, Enforcement Directorate, Customs, Police, Narcotics Control Bureau and SEBI will be able to take cognizance and register separate criminal cases under the respective Acts

Courts shall presume “Culpable Mental State”

To protect persons holding foreign accounts with minor balances which may not have been reported out of oversight or ignorance, it has been provided that failure to report bank accounts with a maximum balance of upto Rs.5 lakh at any time during the year will not entail penalty or prosecution

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Safeguards

Criteria for scrutiny

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

Internal checks and balances required

Balance between prevention of black money and Legitimate right to non intrusive surveillance and privacy

No misuse / fishing expedition / arbitrary use of powers on the source of income declared

Misuse of information may cause harassment to tax payers who may want to come clean

So What is missing in this Bill? Nowhere, we are talking about non generation of black money. The same will be only addressed by addressing root causes like keeping reasonable tax rates, ideal environment, building confidence, simplicity and creating conducive and positive non adversarial tax environment

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Automatic Information exchange – A long term solution 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.

The next challenge regarding Automatic Exchange of Information is now to get all jurisdictions to commit to this Standard and put it into practice

India set to sign the G-20 information sharing agreement on June 3, 2015

“Tax fraud and tax evasion are not victimless crimes: they deprive governments of revenues needed to restore growth and jeopardize citizens’ trust in the fairness and integrity of the tax system. Today’s commitment by so many countries to

implement the new global standard, and to do so quickly, is another major step towards ensuring that tax cheats have nowhere left to hide.”

– Angel Gurría, Secretary-General OECD

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