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White Money, Black Money, Grey Money

Your complete guide to understanding the black money puzzle...
twitter-logoDipak Mondal Print Edition: October 11, 2015
Your complete guide to understanding the black money puzzle
Picture for representation purpose only. Source: Reuters

Life has come full circle for Sukhwinder Gill (name changed). In 2012, he took voluntary retirement from a California-based public transport company, CalTrans, after working there for more than a decade as a civil engineer. On his return to India, he led a comfortable life in a Punjab village and funded his son's post graduation studies at San Jose, University of California, from the monthly pension he received from his erstwhile US employer and the income generated from farm output.

With the promulgation of the new The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 - Gill now finds himself in a quandary. His lawyers have told him that the pension (after paying taxes in the US) he gets is 'black money' under the Act. Gill will not only have to disclose the pension amount he has received since his return to India, but will also have to pay 60 per cent tax on the entire amount (30 per cent tax plus 30 per cent penalty). "I don't have that much money. I may have to ask my relatives for a loan," he says. Gill is now running from pillar to post to get his legitimate income exempted under the double-taxation treaty.

The new Act has a provision for up to 10 years imprisonment for non-disclosure. It gives every foreign asset holder a 90-day compliance window ending September 30, 2015, to declare undisclosed assets, and pay 60 per cent as tax and penalty to escape a jail term. The deadline for paying the tax-plus-penalty amount is December 31.

On August 15 this year, Prime Minister Narendra Modi had announced from the ramparts of the Red Fort that the Centre had already received disclosures of Rs 6,500 crore (nearly $1 billion) under the black money law. What he didn't mention, however, was that the North Block has been flooded with applications from people like Gill seeking clarifications.

Even though the finance ministry has issued two clarifications, confusion prevails over what the exact definition of 'black money' is under the new law, and who will need to disclose it. For instance, should the expatriates and entrepreneurs, who had ventured overseas during the global meltdown and had bought some entity, be required to make disclosures?

In 2009, a four-member task force was set up by L.K. Advani-led BJP had also talked about targeting the "ill-gotten" money stashed abroad, but had made it clear that expats and smaller players should not be taken to task. The panel included the incumbent National Security Advisor Ajit Doval, Lawyer Mahesh Jethmalani, RSS leader S. Gurumurthy and IIM Hyderabad Professor R. Vaidyanathan. Bringing black money stashed abroad has been one of BJP's top war cries since 2009. In fact, in the last general elections, Modi had made an impulsive announcement that he would bring back black money within 100 days of coming to power. Later, party president Amit Shah termed it a political jumla (idiom), which should not be taken literally.

There are many estimates of the amount of black money stashed abroad. They vary from 10 per cent of India's GDP ($100-150 billion) to up to 100 per cent of GDP. India's premier investigating agency, CBI, however, pegs it at $500 billion, while US think tank Global Financial Integrity puts the number at $440 billion. India's forex reserves, on the other hand, are $350 billion.

To realise the desired result, the BJP-led NDA government has also entered into several bilateral and multi-lateral agreements with several countries to get information about Indian account holders in their banks. But can the Indian government bring back this money?


The common criticism against the Black Money Act is that it is too harsh. It has provisions for stringent punishments, which some fear may lead to another era of Inspector Raj. Various tax experts, including a former CBDT chairman, say that the government should have encouraged people to disclose more, rather than use an iron fist. "They should have lowered the tax rate or penalty," he says. But officials at the finance ministry say that the best incentive they could offer is that no criminal case would be initiated if they disclose their assets within the given timeframe. The Act has provision for seven years imprisonment if one fails to furnish details of foreign assets. The punishment could go up to 10 years if the taxman proves that the assessee kept it under wraps deliberately. Technically, the Act also provides powers to the taxman to open any case even beyond the 16-year cap that the Income Tax Act had provided earlier.

"This may lead to a lot of unnecessary litigation," quips a corporate lawyer. Meanwhile, pointing out the anomalies of the new law, Kishan Malhotra, head of tax practices, Shardul Amarchand Mangaldas, says: "If the third generation has inherited about some foreign assets, obviously they would have no clue about where their grandparents got the money from to buy the assets. The problem is that the onus is on you to prove that the money used to buy the asset was accounted money or not. In most cases, the third generation would end up paying tax and penalty, or face imprisonment." A recent explanation from CBDT issued on September 3 clarifies this point to some extent, but not entirely. In cases where bank statements are not available, the assessee can disclose the asset at the best-estimate basis. But there is a rider: if tax authorities believe this was done with a malafide intent, he could be asked to pay a 120 per cent penalty. "The declarations made on a best-estimate basis can easily tantamount to misrepresentation, and can be declared as void-ab-initio," says Rakesh Nangia, founding partner at Nangia and Company, a Delhi-based chartered accountancy firm.

'The Department of Revenue has done a fantastic job in terms of issuing regular FAQs dealing with questions raised by stakeholders to ensure the Act's success,' says Mukesh Butani, Managing Partner, BMR Legal

Similarly, Chennai-based lawyer, Divakar Vijayasarathy, co-founder, online consultancy, says things will get more complicated if one has invested through his foreign account (which was earlier not disclosed), and obviously the investment might have appreciated or depreciated. "It would be a cumbersome exercise, in terms of declaring such accounts and making a fair assessment," he says.

A young entrepreneur from Kolkata, Aditya Gupta (name changed), is facing a unique problem. "I moved back from the US in 2012. I was starting a small venture, and my father-in-law (from San Francisco) was supporting me and my wife by depositing small amounts in my US account. My lawyer friends have told me that I need to declare this as well under the black money law," he says. Sanjay Sanghvi, a prominent corporate lawyer, says: "In your foreign account there could be some debit entries, and they may be genuine transactions. There are chances that the tax department may want to probe those transactions. And this is what is holding people back," he says.

However, officials in the finance ministry say that once people come up with their disclosures, instructions are issued to assess the cases and help those who have genuine cases. But this can only be corroborated once the taxman starts issuing demand letters. History, however, is against the taxmen.

"That the ministry had to issue detailed clarification twice during the disclosure window is a good evidence of how badly this law is drafted," says Kuldeep Kumar, Leader, PwC India. To understand the execution of this Act, BT spoke to at least 35 corporate lawyers and chartered accountants across the country. They say that despite the clarifications, gaps still need to be filled. "One of my clients is ready to disclose his foreign assets, but his other partners are reluctant. This is holding him back," says a Mumbai-based corporate lawyer. The provisions of the new law exempt you from wealth tax, FEMA prosecution, companies act, customs act and income tax. "But there would always be a chance that actions may be found in violation of some other law or provisions of respective regulators," says Malhotra. "You have to evaluate the risk. If it is more risky to disclose than to look for ways to channelise the money, obviously one would opt for the latter," a top corporate honcho told BT. He said that this is a decision one will have to take on an individual basis.

'The deadline of disclosure is very short. The FAQs are still coming. So, within 15 days you have got to get the details of your bank accounts and assets, and get them valued,' says Krishan Malhotra, Head of Taxation, Shardul Amarchand Mangaldas and Co.

Former revenue secretary Shaktikanta Das justifies a tough law for black money. According to him, the law provides adequate safeguards to ensure smooth implementation. Officials at the finance ministry are keeping all disclosures secret, including the amount. According to one estimate, nearly $4 billion may have been disclosed till September 15. In comparison, under the voluntary disclosure scheme of 1997, disclosures worth Rs 33,000 crore were made and Rs 10,000 crore was collected as tax. "They (critics) forget that even under the various amnesty schemes thus far, evaders disclosed only at the eleventh hour because they expected last-minute softening of stand from the government," says another former revenue secretary.

The Indian black money law is broadly based on the 2010 US law, Foreign Account Tax Compliance Act, or FATCA. Under the law, US nationals were required to declare their foreign incomes and assets. The critics of this law claim that in the last four years many US citizens chose to forfeit their nationality, and many feel that the new law may also force the HNIs or expats to give up Indian citizenship to settle for a more liberal tax regime.

In fact, industry lobby group FICCI pointed out that this could be a major discrepancy. "How will an evader be tried if he chooses to leave India permanently," asks a top businessman. At best, the law will force him to avoid returning to India. Former UPA minister and Congress leader, Manish Tewari claims that roughly 80,000 individuals might have already become NRIs in the past six months to circumvent this law. Business Today could not independently corroborate the data.


In November 2014, when G20 leaders met at Brisbane, Australia, Modi had made a strong pitch for repatriation of black money and standardisation in sharing information for tax purposes during the plenary session. The 94 member countries had agreed to sort out the norms, start gathering data from January 2016 and, subsequently, share the data from 2017.

But does India have the necessary infrastructure to deal with the flow of information? What if the member countries are not willing to share the information citing data security and violation of secrecy laws? India may want to tax perpetrators, but for some of the G20 countries, tax havens are a source of income. India already has signed Tax Information Exchange Agreement, or TIEA, with 17 tax havens since 2011, but tax authorities struggle to get information from them. "We have started our exercise to study these aspects of all member countries. The report would be available by mid next year. This would help the countries while decision making," says Monica Bhatia, head, Global Forum Secretariat, at OECD's Centre for Tax Policy and Administration.

'The only way to bring back black money is to get the information and see if it can be leveraged to either prosecute or take punitive action against the offenders,' says Manish Tewari, former Information and Broadcasting Minister and Congress leader. (Photo: Rajwant Rawat)

But there is a catch. Information via automatic route would be available on a common platform, but countries will be able to see data accounts of only their nationals. Under such restrictions, it would be very difficult to decode the information. This is a good enough escape route for the big fish. One of India's top bankers told BT that most of the information which is coming from banks in Europe is very difficult to interpret. "They will have to amend and, in many cases, redraft their KYC norms," he says, adding that the present information in many cases only has names and such information is very difficult to corroborate. For instance, Swiss authorities shared 427 account details, but India could send notices to only 250 of them.

India has pressed banks in Europe, including the ones in Switzerland, to push their Indian clients to disclose their accounts to tax authorities and provide fresh undertakings. The new law has provisions to book these banks for abetting the hoarding of untaxed money. "It is difficult to do it practically, but provisions are there," says another banker.

In October 2014, the Swiss authorities had agreed to assist investigations related to money stacked in their banks. Now Indian authorities are negotiating the bilateral agreement with the Swiss government to share information regularly and automatically. In May this year, Swiss authorities published names of five Indians in their federal gazette's April-May 2015 edition, along with citizens of the UK, US, Spain, Germany, Netherlands and South Korea. These names are Dubai-based Gurjit Singh Kochar, Syed Mohamed Masood, Sneh Lata Sawhney, Chaud Kauser Mohamed Masood and Sangita Sawhney. The Swiss Federal Tax Administration, or FTA, had asked them to file an appeal within a month before the Federal Administrative Court if they did not want their details to be shared with India. "The automatic route may give the information prospectively, but many countries are under pressure to disclose more and shun their secrecy law," says a senior official from the finance ministry. India has a similar agreement in place with the US.

Meanwhile, if India has to take advantage of automatic flow of information by 2017, tax authorities would have to develop a mechanism to sift through the data flowing in. The existing intelligence sharing mechanism among different central economic intelligence and law enforcement agencies needs to overhaul completely. "There would be a huge flow of data. The challenge for India would be to carve out meaningful information out of this data, and execute accordingly," says Bhatia of OECD.


The officials at the finance ministry admit that the new law may not be sufficient to bring back most of the black money stashed outside. There will have to be more efforts to curtail the flow of illicit money. The worry for most of the economies, including India, is that cross-border tax avoidance and evasion is becoming more sophisticated with the advent of technology and mobility of capital. But India made a breakthrough when it pressed European banks to disclose more information. Through peer pressure and OECD, Swiss and other central European banks are moving on from banking secrecy laws. "The Swiss and other European banks are now asking the Indian residents hitherto enjoying their patronage to give an undertaking that their money is legitimate and in compliance with the Indian laws. Some are also asking auditor's certificates to these effects," says a senior official of the finance ministry.

'The government must look at ways to tackle the bigger issue of bringing back the money, which many from corporate India have stashed abroad. They are the big fish, not the expats or smaller players,' says Prof. Ashwini Mahajan, national co-convenor, Swadeshi Jagran Manch (Economic policy think-tank of RSS). (Photo: Rajwant Rawat)

The Modi-led NDA government constituted a special investigation team (SIT) on black money to assist the ongoing litigation before the apex court. The SIT suspects the P-notes to be one of the ways to reroute black money into the system. P-note investments, ended February 2015, was at Rs 2.72 lakh crore. Out of the top five countries from where P-notes come, three are low tax jurisdictions, such as Cayman Islands, Mauritius and Bermuda. Cayman Island with a population of less than 55,000 routed investment worth Rs 85,000 crore.

US-based GFI estimates that $440 billion had moved out of India in the 10-year period from 2003 to 2012. A large portion of this money comes back to India via round tripping. Tax authorities believe participatory notes are a common route, and no one gets to know the real owner of the money. In 2007, India banned P-notes investments in the stock markets, as it was suspected that terror money was being routed. But amid pressures from foreign investors, the ban was lifted in 2008. This is a derivative instrument issued by FIIs to the investors to invest in country's equity and debt market without registering with the regulator. This means, one can invest in the market without disclosing their identity. But since 2007, the market regulator tightened the noose, and their share in FII investments came down from 50 per cent in 2007 to 11 per cent in February 2015.

PM Modi is under pressure from his ideological peers in RSS to crack the whip on domestic black money and web of tax havens, and rework the double taxation avoidance agreement to facilitate information sharing on a retrospective basis. The direct benefit transfer schemes, Jan Dhan Yojna, payment banks, introduction of GST, pushing for early implementation of General Anti Avoidance Rules, or GAAR, are all seen as efforts to curtail the flow of black money domestically.

India has already proposed amendments in Benami Transactions (Prohibition) Amendment Bill, 2015, in the Lok Sabha, and it is currently being discussed by the standing committee of the Parliament. It provides for attachment and confiscation of benami properties, along with a fine and imprisonment. According to estimates, India is riding on a $2-trillion black money economy, which is bigger than the size of the its own economy. This includes transactions in sectors such as real estate, illegal betting, drugs trafficking, jewellery and liquor market, among others.

Meanwhile, to widen the tax base, India is pushing Mauritius to include clauses such as limitation-of-benefits. India wants Mauritius to ensure legitimate businesses get the benefit, but not the shell companies. However, obviously, the island country is resisting. "Many of our tax treaties are used for tax avoidance. If we have DTAAs, corporate houses should get the credit for tax paid in a low-tax jurisdiction like Mauritius, but should pay the differentail to Indian tax authorities, instead of waving the total tax entirely," says Mahajan of SJM. This RSS think tank believes that it is high time to renegotiate these agreements. FM Arun Jaitely while addressing the country's top business honchos at a seminar organised by The Economist in August this year, admitted that he is getting "requests" from various delegations of industry lobby groups to 'go easy' on domestic black money. "They argue, this is at least adding to the economic activity. Now, no economy can indefinitely sustain an argument of this kind," he adds.

The proof of the pudding, therefore, is in the eating. Hope when its served to Indians, it tastes sweet.

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