Tuesday, May 24, 2016

Black Money

I wanted to take 2 days CL on May 25 & 26, 2016. US of C-Group (admin for question branch) told me that a note about my leave record would be sent to me. Went to meet DS this morning around 12 oclock. He told me that leave is to be granted by US(Q)E, that the write-up improvement in the settings. In fact I had finished the write-up on Black Money yesterday, May 23, 2016, and attached with a note sheet, told Murari, the attendant to send it to DS(Q)E.

The Note Sheet

Subject:-  Write up on Black Money
Black Money being a topic of national interest, considerable number of Parliament Questions pour in every session of Lok Sabha and the Government gives replies on the questions. A detailed write-up is put up for perusal.
The write-up is mainly based on the replies given by the Government in response to Parliament Questions. The Government had also given a report on ‘Measures to Tackle Black Money in India and Abroad’ and ‘White Paper on Black Money’ during the year 2012 which are used to supplement the write-up.
Every attempt is made not to quote sources other than the Government’s, which is, of course, not entirely possible always. However, caution is made to avoid taking dates and names from sources other than the Government’s.
Difficulty in tackling Finance-I and preparing write-up is the poor level of promptness in uploading of replies and annexures in the Lok Sabha website. The Government also always seem to prefer terse replies to exhaustive ones.

The write up 


The report of the Committee headed by Chairman, Central Board of Direct Taxes (CBDT) on Black Money in India and abroad in the year, 2012 stated that there is no uniform or accepted definition of ‘black’ money. Several terms are in use – such as ‘black money’,
‘black income’, ‘dirty money’, ‘black wealth’, ‘underground wealth’, ‘black economy’, ‘parallel economy’, ‘shadow economy’, ‘underground’ or ‘unofficial’ economy. If money breaks laws in its origin, movement or use, and is not reported for tax purposes, then it would fall within the meaning of black money. The broader meaning would encompass and include money derived from corruption and other illegal ways – to include drug trafficking, counterfeiting currency, smuggling, arms trafficking, etc. It would also include all market based legal production of goods and services that are concealed from public authorities for the following reasons – (i) to evade payment of taxes (income tax, excise duty, sales tax, stamp duty, etc); (ii) to evade payment of other statutory contributions; (iii) to evade minimum wages, working hours and safety standards, etc.; and (iv) to evade complying with laws and administrative procedures.
In February, 2012, the Director of the Central Bureau of Investigation said that Indians have US$500 billion of illegal funds in foreign tax havens, more than any other country.
In March, 2012, the Government of India clarified in Parliament that the CBI Director's statement on $500 billion of illegal money was an estimate based on a statement made to India's Supreme Court in July, 2011.
As gathered from replies given on Unstarred Question Numbers 140 of March 4, 2016 and   3203 of August 7, 2015, there is no official assessment of black money stashed abroad. Various Non-Governmental Organizations and economists in the past have indicated widely varying estimations regarding illicit financial flows out of the country. Such estimations appear to be based upon different sets of facts, assumptions, presumptions, etc. leading to widely varying inferences. Such estimations also appear to lack unanimity and reliability. The subject matter, therefore, does not appear amenable to reliable estimation. 
The Government also stated in February 27, 2015 in response to Unstarred Question No. 866 that there was no official estimation of amount of black money within and outside the country. But the reply also states that reports received from National Institute of Public Finance and Policy (NIPFP), National Council of Applied Economic Research (NCAER) and National Institute of Financial Management (NIFM) which have been commissioned a study, inter alia, on estimation of unaccounted income and wealth inside and outside the country are under examination of the Government.

In its White Paper on Black Money issued on May 16, 2012 the Government has stated that the ‘criminal’ component of black money may include proceeds from a range of activities including racketeering, trafficking in counterfeit and contraband goods, smuggling, production and trade of narcotics, forgery, illegal mining, illegal felling of forests, illicit liquor trade, robbery, kidnapping, human trafficking, sexual exploitation and prostitution, cheating and financial fraud, embezzlement, drug money, bank frauds, and illegal trade in arms. Some of these offences are included in the schedule of the Prevention of Money Laundering Act, 2002. The ‘corrupt’ component of such money could stem from bribery and theft by those holding public office – such as by grant of business, leakages from government social spending programmes, speed money to circumvent or fast-track procedures, black marketing of price-controlled services and altering land use by regularizing unauthorized construction. All these activities are illegal per se and a result of human greed combined with declining societal values and inability of the state to prevent them.
Thus the factors leading to generation of black money are both social and administrative.
In reply to Unstarred Question No. 1077 given in Lok Sabha on 29 April, 2016, regarding modalities by which black/unaccounted money is taken out of the country Shri Jayant Sinha, the Minister of State for Finance stated:
“The Government has come across instances of transferring money out of the country illegally. Some of such cases detected indicate use of the medium of trade for such transfers which include overvaluation in imports, undervaluation of exports, remitting foreign exchange on the strength of forged import documents, payments/remittances for non-genuine purchases of goods/services/technical know-how, etc.”
As seen from a ‘Wikipedia’ post, such overvaluation in imports, undervaluation of exports seem to involve tax haven countries such as Singapore, UAE, Hong Kong, etc. It is alleged that politicians, political parties and corrupt higher officials of the Government and its institutions take bribes from foreign companies and park/invest the money abroad in tax havens for transferring to India when needed. Many times locally earned bribes/funds/collections are also routed abroad through hawala channels for evading from Indian tax authorities and consequent legal implications.

In reply to Starred Question No. 81 listed for April 29, 2016, the Finance Minister stated,
“…The Income Tax Department (ITD) collects information pertaining to agricultural income of the tax payers, inter alia, through their Income Tax Returns, and the same along with the information collected from various other sources and the information available in the database in the ITD is taken into consideration in the analysis on various risk parameters for appropriate action under direct taxes law. Appropriate action against tax evasion/black money, including in the guise of agricultural income, is an on-going process…”
According to the ‘Wikipedia’ post, the round tripping seems to have involved getting the money out of the country, say India, sending it to a place like Mauritius and then, dressed up to look like foreign capital, sending it back home to earn tax-favoured profits.
Gold imports through official channel and smuggling is a major conduit to bring back the black money from abroad and convert in to local black money as the gold commands insatiable demand among the rural investors particularly. Also fictitious high value round trip transactions via tax haven countries by diamonds and precious stones exporters and importers are a channel for to and fro transactions outside the country. Also, fictitious software exports can be booked by software companies to bring black money in to India as tax exemptions are permitted to software companies,
The White Paper states that in ‘The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008’, Global Financial Integrity (GFI) has estimated that from 1948 to 2008 a total of US$ 213.2 billion has been shifted out of India through illicit outflows. It further estimates that after taking into consideration the rate of return on external assets, the adjusted gross transfer of illicit assets by residents of India amounts to about US$ 462 billion as of
end-December, 2008. It needs to be ascertained whether such an amount is stashed abroad in offshore bank accounts or whether this money has at least partly already returned to India.
FDI statistics perhaps point to this fact. As per data released by the Department of Industrial Policy and Promotion (DIPP), from April, 2000 to March, 2011, the topmost sources of the cumulative FDI inflows from April, 2000 to March, 2011 are Mauritius (41.80 per cent) and Singapore (9.17 per cent). Mauritius and Singapore with their small economies cannot be the sources of such huge investments and it is apparent that the investments are routed through these jurisdictions for avoidance of taxes and/or for concealing the identities from the revenue authorities of the ultimate investors, many of whom could actually be Indian residents, who have invested in their own companies, through a process known as round tripping.
Investment in the Indian Stock Market through Participatory Notes (PNs) is another way by which the black money generated by Indians is re-invested in India. PNs or overseas derivative instruments (ODIs) are issued by Financial Institutional Investors (FIIs) against underlying Indian securities, which can be equity, debt, derivatives, or even indices. The investor in PNs does not hold the Indian securities in her/his own name. These are legally held by the FIIs, but s/he derives economic benefits from fluctuation in prices of the Indian securities, as also dividends and capital gains, through specifically designed contracts.
The Ministry in reply to Unstarred Question No 1077 given on April 29, 2016 stated:
”… Recently, information about certain offshore entities held by various Indian persons has appeared in media. Such information is attributed to be part of ‘Panama Papers’ leaks. The International Consortium of Investigative Journalists (ICIJ), a Washington based organization which has reportedly made the revelations pertaining to the Panama Papers, has put a caveat on its website (www.icij.org) by mentioning that it should not be assumed that everyone who appears in the Panama Papers is involved in tax avoidance or evasion and there are legitimate reasons to create a company in an offshore jurisdiction and many people declare them to their tax authorities when that is required. The Government has taken necessary measures for expeditious investigation in such cases including through enhanced international cooperation”
Documents of around 2,14,000 offshore entities reportedly found are covering almost 40 years. Reportedly, it came from Mossack Fonseca, a Panama-based law firm with offices in more than 35 countries.
The inbuilt mechanism to tackle the menace of black money with the Government, as obtained from the White Paper, are as follows:-
The Central Board of Direct Taxes is a statutory authority functioning across India under the Central Board of Revenue Act of 1963. The Member (Investigation) of the CBDT, exercises control over the Investigation Division of the Central Board of Direct Taxes. The Member is a high ranking IRS officer of the rank of Special Secretary to the Government. The Member (Investigation) controls the:
·               Chief Commissioner of Income Tax Central.
·               Directorate General of Income Tax Investigation
·               Directorate of Income Tax Intelligence and Criminal Investigation.
The Director General of Income Tax (International Taxation) is in charge of taxation issues arising from cross-border transactions and transfer pricing. This organisation has been in operation for nearly 50 years, is primarily responsible for combating the menace of black money, has offices in more than 800 buildings spread over 510 cities and towns across India and has over 55,000 employees and even employees who are deputed from premier police organisations to aid the department.
The Enforcement Directorate was established in 1956. It administers the provisions of the Foreign Exchange Regulation Act of 1973 (FERA), later updated to Foreign Exchange Management Act of 1999 (FEMA). It is entrusted with the investigation and prosecution of money-laundering offences, confiscation of the proceeds of such crime, matters related to foreign exchange market and international hawala transactions. This India-wide directorate, with focus on major financial centres in India, has 39 offices and 2000 employees.
The Financial Intelligence Unit has been operating as a separate investigative entity since 2004. This government organisation for receiving, processing, analysing, and disseminating information relating to suspect financial transactions. It shares information with other Ministries, enforcement and financial investigative agencies of States and Government of India. Every month, it routinely examines about 7,00,000 investigative reports and over 1,000 suspect financial transaction trails to help identify and stop black money and money laundering.
The Central Board of Excise and Customs and Directorate of Revenue Intelligence is the apex intelligence organisation responsible for detecting cases of evasion of central excise and service tax. The Directorate develops intelligence, especially in new areas of tax evasion through its intelligence network across the country and disseminates information across Indian government organisations by issuing Modus Operandi Circulars and Alert Circulars to apprise field formations of the latest trends in tax evasion. It routinely arranges for enforcement operations to research into the evasion of duty and taxes. The Directorate of Revenue Intelligence functions under the CBEC. It is entrusted with the responsibility of collection of data and information and its analysis, collation, interpretation and dissemination on matters relating to violations of taxation and customs law. The organisation has thousands of employees and is divided into seven zones all over India. It maintains close liaison with the World Customs Organisation, Brussels, the Regional Intelligence Liaison Office at Tokyo, INTERPOL, and foreign customs administrations.
The Central Economic Intelligence Bureau functions under the Ministry of Finance. It is responsible for coordination, intelligence sharing, and investigations at national as well as regional levels amongst various law enforcement agencies to prevent financial crimes, generation and parking of black money and illegal transfers. This organisation maintains constant interaction with its Customs Overseas Investigation Network (COIN) offices to share intelligence and information on suspected international financial transactions. The COIN offices gather evidence through diplomatic channels from the foreign custom offices and other foreign establishments to establish cases of mis-declaration to help identify and stop tax evasion and money laundering.
In addition to the primary agencies listed above, India has 10 additional separate departments operating under the Government of India - such as National Investigation Agency and National Crimes Record Bureau - to help locate, investigate and prosecute black money cases. Discovery and enforcement are also assisted by India's Central Bureau of Investigation and State police.
In addition to direct efforts, the Government of India coordinates its efforts with State Governments with dedicated departments to monitor and stop corporate frauds, bank frauds, frauds by non-banking financial companies, sales tax frauds and income tax-related frauds.
Whenever a question is raised in Parliament, the Government resorts to either to generalizing or use of indefinite tense like Income Tax Department has received information from the French Government under the DTAA regarding accounts in HSBC Bank. Whenever such information is received, it is investigated and only thereafter the untaxed amounts are assessed and brought to taxation. The stage of assessment has not arrived in these cases. It is clarified that mere holding of an account outside India does not lead to the conclusion that the amount is tax evaded” as in reply to Unstarred Question No. 2016 given on December 2, 2011. Whereas during Question Hour on February 25, 2011, Finance Minister clarified in reply to a supplementary question on Starred Question No. 63 as But it (DTAA) is not yet ratified as far as the laws of the Switzerland are concerned. They will give us information, but that information will be prospective from the 1st of April 2011 and thereafter we shall be able to trace back. It would be our job and once we get a clue then it would be possible for us. With your permission, Madam, I can also share that we are having the wide-pronged strategy to unearth the black money….”
In reply to Lok Sabha Unstarred Question No. 600, the Minister of State for Finance stated on February 26, 2016 as,
The Government has taken several effective steps, both by way of policy level initiatives as well as through more effective enforcement action on the ground, to curb the menace of black money in the country. These steps include :
(i) Constitution of the Special Investigation Team (SIT) on Black Money under the Chairmanship and Vice-Chairmanship of two former Judges of Hon’ble Supreme Court.
(ii) Enactment of a Comprehensive new law titled ‘The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015’ to specifically and more effectively deal with the issue of black money stashed away abroad which has come into force w.e.f. 01.07.2015.
(iii) Introduction of the Benami Transactions (Prohibition) Amendment Bill, 2015 to amend the Benami Transactions (Prohibition) Act, 1988 with a view to,
inter-alia, enable confiscation of Benami property and provide for prosecution.
(iv) Proactively engaging with foreign governments for enhanced exchange of information under Double Taxation Avoidance Agreements (DTAAs)/Tax Information Exchange Agreement (TIEAs)/Multilateral Conventions.  
(v) According high priority to the cases involving black money stashed away abroad for investigation and other follow-up actions.
(vi) While focusing upon non-intrusive measures, due emphasis on enforcement measures in high impact cases with a view to prosecute the offenders at the earliest possible for credible deterrence against tax evasion/black money.
(vii) Proactively furthering global efforts to combat tax evasion/black money, inter-alia, by joining the Multilateral Competent Authority Agreement in respect of Automatic Exchange of Information and having information sharing arrangement with USA under its Foreign Account Tax Compliance Act (FATCA).
(viii) Rationalization of the PAN quoting requirements in respect of certain financial transactions which includes the need of compulsory quoting of PAN for sale or purchase, by any person, of goods or services of any nature (other than those for which separate requirements have been prescribed under rule 114B of the Income-tax Rules, 1962) of the amount exceeding Rs. 2 lakh per transaction w.e.f. January 1, 2016.
On the Punitive side, appropriate action against evasion of taxes/black money is an on-going process. Such action under direct tax laws includes searches, surveys, enquiries, assessment of income, levy of tax, interest, penalties, etc. and filing of prosecution complaints in criminal courts, wherever applicable.
The Special Investigation Team (SIT) submits its reports directly to the Hon’ble Supreme Court. So far, SIT has submitted four reports inter-alia recommending the following:-
(i) There should be institutional mechanism through a dedicated set up which examines mismatch between export/import data with corresponding import/export data of other countries on at least a quarterly, if not monthly basis.

(ii) To make declaring PAN mandatory for all sales, where payment is in cash or through bank, above a value of Rs. one lakh.
(iii) To control holding of unaccounted money to a large extent, a threshold cash holding limit of Rs. 10 lakhs or 15 lakhs should be prescribed.
(iv) To make tax crime as a predicate offence.
(v) Foreign Exchange Management Act, 1999 (FEMA) should be amended to provide for seizure and confiscation of property of equivalent value within the country, if it is held that property held abroad is in violation of Section 4 of FEMA.
(vi) FIU should have access to widest possible range of financial, administrative and law enforcement information.
(vii) SEBI needs to have an effective monitoring mechanism to study unusual rise of stock prices of Companies and misuse of exemption on Long Term Capital gains tax for money laundering.
(viii) SEBI needs to examine misuse of Participatory notes for money laundering and come up with regulations where the “final beneficial owner” of P notes/ODIs are known. The information of “beneficial owner” with SEBI should be in form of individual whose KYC information is known to SEBI. 
(ix) P notes are transferable in nature. SEBI needs to examine if this provision of allowing transferring of P notes is in any way beneficial for easing foreign investment. Any investor wanting to invest through P notes can always invest afresh through a Foreign Portfolio Investor (FPI) instead of buying from a P note holder. 
(x) Proactive detection of creation of shell companies.
(xi) All cases of Trade based money laundering detected by DRI where violation of section 132 of Customs Act, above the threshold provided for in Part B of Schedule of Prevention of Money Laundering Act, 2002 (PMLA) has been found, must be shared by DRI with the Enforcement Directorate to enable ED to take action under Prevention of Money Laundering Act.
(xii) Generation of black money in education section and through donations to religious institutions and charities must be curbed. CBDT should take appropriate action for expeditious finalization of the assessment, if required, punitive action may be taken.

The Government has in reply to Unstarred Question No. 1077 further informed Parliament on April 29, 2016 that it has constituted a Multi-Agency Group on  April 4, 2016, inter alia, for facilitating co-ordinated and speedy investigation in the cases of Indian persons allegedly having undisclosed foreign assets and whose names are reportedly included in Panama Papers leaks. The Group consists of the officers of Investigation Division of the Central Board of Direct Taxes (CBDT), Foreign Tax & Tax Research Division of CBDT, Enforcement Directorate (ED), Financial Intelligence Unit (FIU) and Reserve Bank of India, and its Convener is Member (Investigation), CBDT. It has been asked to report the progress in such cases on regular basis. Investigation in such cases was at preliminary stage. Further course of action depends upon outcome of the investigation in respective cases.
As a result of the aforementioned steps taken a total of 648 declarations have been made under the one-time three months’ compliance window provided in Chapter VI of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The compliance window closed on  September 30, 2015.
As on March 3, 2016 when the Ministry of Finance gave reply to Unstarred Question Number 1411, the Government received undisclosed foreign assets worth Rs. 4164 crore (including those declarations which were posted before 30th September 2015 and received after 30th September 2015) in respect of which the declarants were liable to pay tax at the rate of 30 per cent along with penalty at the rate of 30 per cent  by 31st December 2015. The Government had received a total amount of Rs. 2476 crore by way of tax and penalty.
The Act is a one-time window for disclosure of undisclosed foreign income and assets for the period between July 1, 2015 to September 30, 2016.
India is also part of the global efforts to combat black money. It attended the meetings of G-20 leaders like the one held in London on April 2, 2009 (reply to Unstarred Question
No. 1353 dated 27.11.2009) and also in Turkey in November 15 & 16, 2015 (Unstarred Question No. 2111 dated 11.12.2015). In such meetings the issue of black money invariably comes up in the discussions.


the file no. 19(7)/write up/xvi/2016-Q recorded on 13.6.2016