[The following guest post is contributed by Dr. Nigam Nuggehalli, who is an Associate Professor at Azim Premji University, Bangalore]
The Modi government has been unique among the current and past political dispensations in giving unprecedented political currency to the issue of undisclosed foreign assets of Indian residents. The so called black money issue, always simmering under the surface in Indian politics, has now taken on an urgent and conspicuous hue because of its use in the NDA’s electoral campaigns. The Undisclosed Foreign Asset and Income (Imposition of Tax) Bill 2015, popularly known as the Black Money Bill, is the legislative expression of the NDA’s campaign against foreign assets and income that have not been disclosed to Indian tax authorities. The Bill does not confine itself merely to penalising and criminalising tax evasion; instead it purports to create an entire administrative and penal machinery to address this behavior. If this legislation is enacted, Indian residents who have not disclosed their assets or income from foreign sources would be subject to a legislative architecture that exhaustively details the investigation of foreign (not domestic) tax evasion, the trial procedures for tax offenders and the sentencing of such offenders.
Catching tax evaders requires complex forensic investigation, which would be conducted by designated officials who would have extensive powers of discovery and inspection, powers to examine people on oath, and to compel the production of books of accounts. The assessment orders under the Bill can be appealed to the Income Tax Commissioner (Appeals) with further appeals to the Income Tax Appellate Tribunals, High Courts and the Supreme Court. Much like the provisions in the Income Tax Act, 1961, the money due from tax evaders can be recovered directly from the employers or the debtors of the tax evaders. The penalties for non-payment of taxes are severe: three times the amount of tax payable. There are separate penalties for non-cooperation with tax authorities. For example, a taxpayer can be penalised for not answering questions put to him by a tax authority, if such refusal to answer questions does not have a reasonable cause behind it.
The headline grabbing feature of the Black Money Bill relates to the criminalisation of tax evasion. A person found guilty of willfully evading taxes under the Bill can expect to go to jail for a minimum period of three years and a maximum of ten years. A person can be held to be willfully evading taxes for a variety of reasons including by virtue of being in possession of books of accounts containing false entries. The persons at risk of prosecution under the Bill need not necessarily be tax evaders; such persons can also include banks and financial institutions that aid tax evaders in hiding their income abroad. The Bill has modified the traditional safeguards of criminal law that often help the accused. For example, the mental state required to be convicted under this Bill ('wilfully') would be assumed by the court trying the accused and it is for the accused to prove otherwise.
Recognising that many cases of tax evasion are undertaken by corporates rather than individuals, the Bill provides that where an offence has been committed by a company, every person in charge of and was responsible for the conduct of the business of the company shall be deemed to be guilty of the offence, unless the offence was committed without his knowledge or he had exercised all due diligence to prevent the tax evasion. Interestingly, the Bill does not contain any provisions specifically targeting foreign trusts, and this omission is particularly glaring in the light of the well-known fact that for reasons of secrecy, illicit assets abroad are usually held through trusts.
The provisions described above make it appear that the Black Money Bill is a remarkable piece of law making. However, appearances are deceptive. The Indian Income Tax Act, 1961 already addresses all the issues purported to be addressed by the Black Money Bill. If an Indian resident does not disclose his income earned abroad, he or she is subject to criminal liabilities under the Act. The Act has detailed rules on investigation, prosecution, trial and sentencing of such tax evaders, and has had these rules since the seventies. The assumption of a guilty mental state, which appears to be an innovation under the Bill, is already present in the Income Tax Act, 1961. The vicarious criminal liability of the directors of the company, another purported innovation in the Bill, is a feature already recognised in the Act. Abettors of tax evasion, such as banks and other financial institutions, can be prosecuted under the Act. The penalty provisions in the Bill mirror those in the Act. Even the appeals process in the Bill follows that specified in the Act.
It is clear on a close reading that the Black Money Bill identifies and provides for offences and prosecutions that have already been accounted for in the Income Tax Act, 1961.If this is the case, is there any particular reason why the Black Money Bill is needed? It is hard to see what purpose this Bill serves, other than to enable the current government to make a political statement that it is tough on black money stashed abroad. One might believe that the stringency in criminal sanctions is an innovation. However, the harshness of criminal sanctions has hardly had any effect on crime in other domains in India. Even in the case of tax evasion, the Income Tax Act already provides for a maximum punishment of seven years imprisonment. Increasing the maximum length of incarceration to ten years is hardly an innovation.
The only genuine innovation in the Black Money Bill comes in the concluding section of the bill, where an offence under the Bill becomes an offence recognised by the Prevention of Money Laundering Act, 2002. The practical effect of this linkage is that the assets of the tax evader are now subject to attachment and confiscation under the money laundering legislation. However, it would have been better if the same linkage could have been established between offences under the Income Tax Act, 1961 and the money laundering legislation, which would have had the added virtue of bringing all tax evasion (not only the foreign kind) under the money laundering legislation.
Last year, a stringent piece of financial legislation, the Securities Laws (Amendment) Act, 2014, was enacted to give SEBI more powers and included a provision for special courts to try securities related offences expeditiously. Compared to this, the Black Money Bill does not provide income tax officers with any significant new set of powers to combat the problem of black money; nor does the Bill provide for special courts to deal with the problem. Perhaps, if one were to be generous, it can be acknowledged that, for the first time, black money and foreign jurisdictions have been explicitly linked. But the previous government's white paper on black money itself admits that ‘a large part of the illicit flows from India may have returned.’ The White paper focused on the issue of undisclosed money in the stock market, property market and jewellery market, among others, and all of these were Indian locations. Why are we focused on what's happening abroad when the real problem is amongst us?
- Dr. Nigam Nuggehalli