Higher tax regime and stringent foreign exchange restrictions in the past encouraged many Indian residents to park a part of their wealth abroad. For bringing this money back, India has entered into Tax Information Exchange Agreements (TIEAs) with a number of tax havens.
Let's examine their efficacy in bringing back the existing money abroad, particularly from Switzerland where a majority of the Indian money is believed to be hidden.
'Under the new UK-Swiss tax treaty, the UK will get from the Swiss authority
tax on the Swiss assets of the UK residents, and that too for the past years.
The USA and Germany also got a good deal from Switzerland.
India, however, got a raw deal – Switzerland will only provide information on black money, that too if it relates to a period after 1.4.2011. Further, India has to provide the name of the alleged Indian offender and the Swiss person who will have the information – it can not ask for the details of all the Indian tax payers' bank accounts in Switzerland. It is a no-brainer that such a provision will not be very effective.
Hence, despite the TIEAs, looking at our longdrawn out administrative and legal processes and a large number of countries involved, the regular channels will not be effective.
TAX IMPACT ON OWNER OF UNACCOUNTED OFFSHORE MONEY :
Let's assume that a resident Indian has unaccounted monetary assets of .`10 crore abroad which he earned 10 years back. Further, on that amount, he has earned, say, Rs 1.5 crore in the past 6 years. Under the Indian Income Tax Act, income tax, interest and penalty on the income of only the past six assessment years can be recovered. Hence, in this case, the total incidence of income tax, interest and penalty levied on him comes out to Rs 1.18 crore to Rs 2.18 crore. Any unaccounted income earned prior to 1.4.2004 will not be taxable.
Further, the person can be prosecuted in India for filing false returns of his income for all the past years. If the unaccounted wealth and income are held through a complex structure of trusts and companies, then the tax implications may be different and lower.
FERA/FEMA/PML CONSEQUENCES:
On 01.06.2000, Foreign Exchange Regulation Act (FERA) was abolished and Foreign Exchange Management Act (FEMA) was enacted. Any violation under FERA cannot be punished now. However, if a resident Indian continues to hold any unaccounted foreign asset without the RBI's permission after the introduction of FEMA, he can be charged with a monetary penalty of up to three times the amount involved.
It is very unlikely that compounding provision under FEMA would be invoked. Tax evasion is not an offence under the Prevention of Money Laundering Act. Thus, the combined outflow for a person under the income tax law and FEMA is likely to exceed 100% of the total unaccounted money abroad.
WAY FORWARD:
I neither like an amnesty scheme on the ground of morality, nor do I like Indian unaccounted money hiding abroad. So I choose a lesser evil of amnesty. Without amnesty, people will not voluntarily come forward and pay more than 100% of their foreign black money and face the imprisonment sword under the income tax law.
Unaccounted Indian money lies in several countries. To motivate resident Indians to voluntarily bring back this money to India, the government should ensure that a person is not required to pay more than 100% of his foreign unaccounted wealth under all the laws and is not prosecuted. This will enable India to get back billions of dollars lying abroad which will help bridge India's deficit.
In the past, the Supreme Court upheld the validity of the 1997 amnesty scheme (see 231 ITR 24(SC)). The Indian Parliament, with a simple majority, can take pragmatic steps to bring the foreign unaccounted money to India. Thereafter, strictly deal with those who do not voluntarily comply.
India, however, got a raw deal – Switzerland will only provide information on black money, that too if it relates to a period after 1.4.2011. Further, India has to provide the name of the alleged Indian offender and the Swiss person who will have the information – it can not ask for the details of all the Indian tax payers' bank accounts in Switzerland. It is a no-brainer that such a provision will not be very effective.
Hence, despite the TIEAs, looking at our longdrawn out administrative and legal processes and a large number of countries involved, the regular channels will not be effective.
TAX IMPACT ON OWNER OF UNACCOUNTED OFFSHORE MONEY :
Let's assume that a resident Indian has unaccounted monetary assets of .`10 crore abroad which he earned 10 years back. Further, on that amount, he has earned, say, Rs 1.5 crore in the past 6 years. Under the Indian Income Tax Act, income tax, interest and penalty on the income of only the past six assessment years can be recovered. Hence, in this case, the total incidence of income tax, interest and penalty levied on him comes out to Rs 1.18 crore to Rs 2.18 crore. Any unaccounted income earned prior to 1.4.2004 will not be taxable.
Further, the person can be prosecuted in India for filing false returns of his income for all the past years. If the unaccounted wealth and income are held through a complex structure of trusts and companies, then the tax implications may be different and lower.
FERA/FEMA/PML CONSEQUENCES:
On 01.06.2000, Foreign Exchange Regulation Act (FERA) was abolished and Foreign Exchange Management Act (FEMA) was enacted. Any violation under FERA cannot be punished now. However, if a resident Indian continues to hold any unaccounted foreign asset without the RBI's permission after the introduction of FEMA, he can be charged with a monetary penalty of up to three times the amount involved.
It is very unlikely that compounding provision under FEMA would be invoked. Tax evasion is not an offence under the Prevention of Money Laundering Act. Thus, the combined outflow for a person under the income tax law and FEMA is likely to exceed 100% of the total unaccounted money abroad.
WAY FORWARD:
I neither like an amnesty scheme on the ground of morality, nor do I like Indian unaccounted money hiding abroad. So I choose a lesser evil of amnesty. Without amnesty, people will not voluntarily come forward and pay more than 100% of their foreign black money and face the imprisonment sword under the income tax law.
Unaccounted Indian money lies in several countries. To motivate resident Indians to voluntarily bring back this money to India, the government should ensure that a person is not required to pay more than 100% of his foreign unaccounted wealth under all the laws and is not prosecuted. This will enable India to get back billions of dollars lying abroad which will help bridge India's deficit.
In the past, the Supreme Court upheld the validity of the 1997 amnesty scheme (see 231 ITR 24(SC)). The Indian Parliament, with a simple majority, can take pragmatic steps to bring the foreign unaccounted money to India. Thereafter, strictly deal with those who do not voluntarily comply.
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