Sending black money holders to the cleaners

Undisclosed Foreign Income and Assets (Imposition of Tax) Bill - UnFINA fills a small hole related to income & assets abroad and is an addition to multiple laws & acts in India, aimed at money laundering

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Much ink has been spilt on the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill (UnFINA) in the last few days, but most of this is based on the bill’s sections, directives and penalties, as cleared by the Cabinet. The conversations around UnFINA have been relegated to the number of years of imprisonment, fines and percentage of penalties, leading to a classic case of missing the woods for the trees.

In essence, the UnFINA Bill provides for separate taxation of undisclosed income in relation to foreign income and assets. It is proposed that such income should, henceforth, not be taxed under the Income-tax Act, 1961 but under the provisions of the new legislation. Combined with defined punitive measures of penalties and imprisonment, one has, in theory, a potent addendum to the growing net of laws and measures against money laundering.

It is expected that the government may provide a compliance window of three to six months, though it is our view that a window of at least nine months should be given for those who may want to use this one-time opportunity to liquidate their assets and bring them back to the country. It is also important to note that this is not an amnesty scheme, even though differential rates of penalties are being applied.

It is amply clear, that the new law has borrowed, in places, from the existing Income-tax Act, 1961 and hence by that singular measure, it is not radically new. Our politicians and bureaucrats had either the foresight or were faced with black money related issues at the time of enactment of the Income-tax Act in 1961. This shouldn’t come as a surprise, especially since the first major law targeting black money came into play with the Bank Secrecy Act, 1970 (USA). It is well known that the Hawala route of financial transfers was prevalent during medieval times and restricted even by Roman law. In short, this is an old issue, which has been recognised and dealt with under modern laws for over 60 years.

Any new law or directive that seeks to rein in black money should be innovative and radical enough to effect major evolutionary changes. UnFINA seems to take incremental steps, at best, and widens the regulatory net against black money.

Black money is now prevalent enough in public consciousness for us to discuss the real underlying issues. It is usually viewed through the moral prism of ‘Good Vs Evil’. The truth is that, our financial infrastructure, convoluted tax policies, economic history, growth issues, terrorism and political requirements are factors in this increasingly complex issue. Hence, black money should be seen under two broad themes of ‘Redeemable’ and ‘Infected’.

While the former is black money which has been created out of income, or asset, on which taxes have not been paid, ‘Infected’ black money is related to ‘Proceeds of Crime’ i.e. income generated from nefarious, anti-national and illegal activities such as drugs, human trafficking, terrorism, corruption etc. It is worthwhile to note that the principle behind major AML (Anti-money Laundering) compliance norms across the world are aimed at tackling ‘Infected’ black money rather than ‘redeemable’ black money.

A close look at the demand and generation of black money, will give a better perspective on the prevalence of money laundering activities in India. Black money is used to fund one of the largest ongoing democratic exercises in the history of mankind i.e. the indian elections. These are the extensive and intensive, year-round activity of electing representatives in the Lok Sabha, state assemblies, municipal, gram, zila and block panchayats, student bodies and other unions. Hence, any law, act or force must look at rectifying this fundamental issue which leads to a moral vacuum and leadership deficit in our fight against money laundering.

Ever since the days of the Licence Raj—when there prevailed over 100% taxation rates and extensive red tapism—the business community has found financial solace in keeping a significant portion of their businesses off the books. Along with simplifying taxation (GST & other measures), reducing the complexities of getting the right approvals and licences (single-window process), the business community needs to proactively rectify the tax-evasion culture and wean itself off the need for unaccounted profits.

The list of illegal & criminal activities which lead to the generation and usage of black money is fairly lengthy and equally perilous. It is these set of issues which will ultimately decide the success or failure of our Anti-money laundering laws. Make no mistake, ‘infected’ black money is generated through these activities and represents clear and present danger. Hence any law, which does not address the root causes of funding of these illegal and nefarious activities is, at best, window dressing.

UnFINA fills a small hole related to income and assets abroad and is an addition to the multiple laws and acts in India, aimed at curbing money laundering. Having said that, if the government is genuinely interested in leveraging its power and can somehow coordinate the various government agencies to tackle this issue, it may be looking at achieving five distinct objectives with UnFINA:

1. By separating ‘redeemable’ and ‘infected’ black money, it can trim the problem to a manageable size.
2. The compliance window will bring in much needed revenue into government coffers.
3. Offering businesses, organisations, associations and businessmen the ability clean up their books and get a fresh start.
4. Redefining, refining and regulating the processes and response of financial institutions & banks to safeguard them against money laundering.
5. Developing focused responses and coordination between agencies to tackle infected’ black money.

These would be huge wins for the present government and aid in our fight against money laundering.

(Views expressed are personal)

- By Sarabjeet Singh, Partner, Risk Advisory, BMR Advisors with inputs from Abhishek Bali, Vice President, Risk Advisory, BMR Advisors

The thoughts and opinions shared here are of the author.