BLACK MONEY

CONCEPTS AND DEFINITIONS OF BLACK MONEY

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.

There are three sources of black money – crime, corruption and business.

The ‘criminal’ component of black money would normally include proceeds from a range of activities including racketeering, trafficking in counterfeit and contraband goods, forgery, securities fraud, embezzlement, sexual exploitation and prostitution, drug money, bank frauds and illegal trade in arms.

The ‘corrupt’ component of such money would stem from bribery and theft by those holding public office – such as by grant of business, bribes to alter land use or to regularize unauthorized construction, leakages from government social spending programmes, speed money to circumvent or fast-track procedures, black marketing of price controlled services, etc.

The ‘commercial’ limb of black money usually results from tax evasion by attempting to hide

transactions and any audit trail relating thereto, leading to evasion of one or more taxes. The main reason for such black economy is underreporting revenues / receipts / production, inflating expenses, not correctly reporting workers employed to avoid statutory obligations for their welfare.

Opening of the economy permits contracts of all kinds – particularly for allocation of scarce resources such as mineral and spectrum – which, in the absence of transparent rules and procedures for licenses and non compliance of contractual obligations of the persons concerned, leads to increased generation of black money.

In all the three forms of black money – ‘criminal’, ‘corrupt’ and ‘commercial’ – subterfuges are created which includefalse documentation, sham transactions, benami entities, mispricing and collusion. This is often done bylayering transactions to hide their origin.

Studies correlating the extent of corruption with the size of the ‘shadow economy’ have been few.

There is, however, reason to believe that it differs among high and low income countries. In high income countries, the official sector provides good governance and proper enforcement of contracts. In the developing countries, on the other hand, enterprises could engage in entirely unreported activity – restaurants, bars, doctors, lawyers – and even bigger manufacturing entities may indulge in under-reporting. Big companies, though easier to monitor – in order to escape rigours of taxation – may take recourse to inducements. Under such socio-economic conditions, the ‘underground’ economy and corruption arelikely to reinforce each other.

Level of development affects extent of black economy in another way. Developing countries

have large parts of their economy in the informal sector, which is difficult to regulate. Further, cash component of the economy is usually higher and leads to problems of monitoring. Lack of regulation and monitoring reinforces the black economy and also helps its expansion. Opportunities for leakages increase. Low level of literacy reduces penetration of the banking sector resulting in a large cash economy.

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CAUSES & METHODS ADOPTED FOR GENERATION OF BLACK MONEY, MOST PRONE SECTORS OF ECONOMY

1.Generally, rising burden of taxation, both actual and perceived, provides a strong temptation to participate in the black economy.

2.Increasing burden of compliance also gives a strong reason to enter the black economy.

3.Lack of tax morality, or non-compliant attitude of the citizenry towards tax laws, also tends to increase the size of the black economy.

4.Studies indicate that countries with relatively poor regulation of their economies tend to have a higher share of unofficial economy in the GDP, while countries with proper regulations have smaller ‘black’ economies.

5.Developing countries generally have higher levels of controls, leading to significantly higher effective taxes on official activities, a large discretionary framework of regulations and, consequently, a higher ‘black’ economy. Developed countries tend to have better enforcement of laws, balanced regulatory burden, better tax to GDP ratio resulting in sizeable revenue mobilization and, therefore, relatively smaller ‘black’ economies.

6.While in developed countries / areas like USA, Canada and Europe black money is generated

primarily through illegal activities such as drug trade, illegal migration, etc., in the developing countries in Asia and Africa, generation of black money is from all conceivable sources – corruption and siphoning of public resources, trade-based black money due to non-reporting of incomes or profits and inflation of expenses, and through a host of criminal activities such as illicit manufacturing of counterfeit goods, smuggling, extortion, cheating and financial frauds, illicit narcotics trade, printing and circulation of fake currency, illicit manufacturing / trade in arms, ammunition and explosives, etc.

Suppression of receipts, inflation of expenditure, etc.

1.The primary method of generation of black money remains suppression of receipts and inflation

of expenditure. The suppression could be over a range of businesses and industrial activities which are covered by what may be called ‘primary’ enactments to regulate sale receipts, actual production, charging amount in excess of statutory amounts, etc.

Duties are imposed on manufactured goods through the Central Excise Act by the Central Government. However, the states of the Indian Union have a wide array of powers under List-II of the Constitution.

Therefore, the Income Tax Act becomes a ‘secondary’ Act. What is hidden from state authorities

cannot be shown for the purpose of income tax, as such hidden element is already a part of the ‘black’ economy. Moreover, if an income tax investigation subsequently reveals infringement of state laws, the courts tend to favour the transgressor, as the evidence of his records have been ‘accepted’ by state authorities.

2.However, as manipulation of income is not always possible by suppression of receipts, tax-payers may try to inflate expenses by obtaining bogus or inflated invoices from ‘bill masters’, who make bogus vouchers and charge nominal commission. As these persons are of very modest means, upon investigation, they tend to leave the business and migrate from the city where they operate. This is one of the reasons for a proportion of income tax arrears attributed to ‘assessee not traceable’.

3. Similarly, there are other categories of small ‘entry operators’, who provide accommodation entries by accepting cash in lieu of cheque/ demand draft given as loans / advances / share capital, etc and thereby launder large sums of money at miniscule commissions. Due to frequent migration, such entry operators escape prosecution under the Income Tax Act. The appellate tax bodies also tend to tax their income at nominal rates. There is no effective deterrence, except for taxing commission on such bogus receipts and tax in the hands of beneficiaries. Providing fake bills and entries need to be dealt with strongly and as criminal offence under the tax laws.

Land and real estate transactions

Land and real estate are possibly the most important class of assets used for investment of ‘black’

money. As immovable properties are not usually comparable, valuations are different. This imparts flexibility to the valuation process, and makes it an ideal investment for ‘black’ money. As an asset class both ‘black’ and ‘white’ savings are utilized for investment in land and real estate, which provides hedge against inflation apart from a profitable alternative for investment for black savings.

The availability of urban centres and developed areas critically depends on the policy of the

government as change of land use and development of infrastructure is largely in its hands. If resources are concentrated on developing infrastructure in select areas then development accentuates land and property prices in these areas. Master Plan of an urban agglomeration is many a time found to be changed and re-changed again. The more developed parts exert a pull on the less developed parts and infuse a push in prices. Such change is at a ‘cost’ to the developer paid from the black component of his business.

With rapid urbanization, large areas of farmlands fall in the urban agglomeration of metros, emerging metros and large cities. Surveillance indicated that cash rich individuals or other entities generating black money through suppression of production profits of pan masala, oil,para-banking, big corporate houses, etc., paid large sums of purchase consideration in cash to farmers. Such acquisition of land by cash payment has the consequence of facilitating routing of black incomes and as farmers move elsewhere.

Presently, the only way the Income Tax department monitors such payments is through the Central Information Branch (CIB), where such information is obtained from the Registrar of properties. There is reluctance to comply with the requirement, and it also involves a time lag before the assessing officer is seized of the matter, and because of the time lag verification of on-money payments is not possible.

With continuous rise in prices along with tax benefits on residential properties, high-net worth

individuals are motivated to invest in properties, mainly with a view to transferring them and encashing the ‘gain’ as capital gain, which enjoys special tax treatment and benefits. As a result their investment would not generate desirable activity, as sales on investments of a residential house are tax-free, if reinvested. Such ‘flipping’ provisions of Section 54 usually help high net-worth individuals. From the angle of welfare of the community, the investment gets channelized to an unproductive activity – speculating in the price of real-estate.

Corruption

The cancerous growth of corruption at every stage of interface of the public with officials by way

of commissions on mega-projects, kick-backs on mega purchases abroad, leakages in public spending, are all a matter of serious concern.

In India, it is widely reported that corruption is pervasive and appears impossible to eliminate. At

the grass root level, corruption is practiced in millions of exchanges that ordinary people have at lower levels of bureaucracy – for licenses, procuring services, etc. – as part of government’s delivery mechanism. Cumulatively a punitive cost is imposed on the poor and lower middle classes. In contrast, instances of large-scale corruption at the national and regional scale, though distant from petty instances of everyday life, have a shock and awe effect and tends to provide a rationalization for lower level corruption.

In the Corruption Index for 2010 prepared by Transparency International, India ranked a lowly 87 out of 178 countries (Brazil, China are better placed). In the latest report of 2011, India’s rank slipped further to 95 out of 182 countries, whereas Brazil, South Africa and China continue to be ranked higher.

The ‘Ease of Doing Business’ index of the World Bank ranks countries on ten parameters, namely, starting a business; dealing with construction permits; getting electricity; registering property; getting credit; protecting investors; paying taxes; trading across borders; enforcing contracts; resolving insolvency. This index averages the country’s percentile ranking on ten topics, giving equal weight to each topic – benchmarked to June, 2011. India is a lowly 132 (out of 183 countries) on the Ease of Doing BusinessIndex as against high ranking developed countries like Singapore, UK and USA, or even BRICS nations, It is widely believed that the election process requires considerable funds whereas resources declared by major political parties do not appear to be sufficient to meet the actual expenditure and therefore are believed to be funded also through black money. Further electoral reforms are also required to reduce election costs.

With increased economic activity, bribes in public private partnership of large projects and large civil works have been detected. Allocation of natural resources is allegedly discretionary and non-transparent. Corruption has also been alleged in defence procurement, foreign consultancy, aircraft purchases, petroleum and gas sectors, purchases abroad, etc. It is reported that despite prohibition on kickbacks in the developed world, ways are found to make such payments through spurious agreements and shady entities, which in turn are alleged to be secreted away in bank accounts in tax havens.

Financial market transactions

While some sections of the financial markets have become better regulated, many sections

remain relatively unregulated. Advances in technology provide possibilities of better reporting systems.

Investments are made in the secondary share markets with a view to capturing gains. In this

market, out of nearly 8,000 listed companies, several scrips are not traded regularly. With the collusion of promoters, some brokers arrange for price(s) with purchase of such scrips at nominal costs, and sales at exorbitant prices, with a view to receiving money on sale as ‘capital gain’ when the long term gain is subjected to a ‘nil’ or nominal rate of tax. The advantage for manipulative taxpayer is that he can launder such sale receipts through payment of no tax.

Often price sensitive information is obtained and the gain is sought to be made on the basis of

asymmetrical information, involving ‘insider-trading’ and also ‘fronting’, through intermediary companies, which hide the individuals behind the corporate veil. Though SEBI is an effective regulator, instances of ‘insider-trading’ or ‘fronting’ are not unknown. Though the stock-exchanges have internal audit, intermediaries are permitted to make genuine corrections in the last fifteen minutes, in respect of transactions entered into by them. However, instances of collusive corrections being made by brokers for obliging clients, using the term ‘fat finger’ for collusive deals, usually losses have been reported both in the share and derivative segments of the stock market. ‘Dabba-trading’ or trading outside the recognized stock exchanges, similarly contribute to the parallel economy.

Bullion & jewellery transactions

Cash economy and use of counterfeit currency

The main difficulty with such transactions is that they have inadequate audit trail leading to

leakages, estimated by developmental economists to vary between 15% and 40%. The oversight relies generally on financial audit.

Demonetization of high denomination currency notes is believed to be one of the methods to ‘kill’ the extant black economy, and to curb the generation of black money.

Trade Based Money Laundering

Financial Action Task Force (FATF) defines Trade Based Money Laundering (TBML) as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins. In simpler terms, TBML is the process of transferring / moving money through trade transactions. In practice, this can be achieved through the misrepresentation of the price, quantity or quality of imports or exports.

The international trade system is subject to a wide range of risks and vulnerabilities, which provide unscrupulous entities the opportunity to launder money. The relative attractiveness of the international trade system is associated with:

a) The enormous volume of trade flows, which obscures individual transactions and provides abundant opportunity to transfer value across borders;

b) The complexity associated with (often multiple) foreign exchange transactions and recourse to

diverse financing arrangements;

c) The additional complexity that can arise from the practice of mingling illicit funds with the cash flows of legitimate businesses;

d) The limited recourse to verification procedures or programmers in order to exchange customs

data between countries; and

e) The limited resources that most customs agencies have to detect illegal trade transactions.

Differing tax rates create incentives for corporations to shift taxable income from jurisdictions with relatively high tax rates to jurisdictions with relatively low tax rates in order to minimize income tax payments.

Companies and individuals also shift money from one country to another to diversify risk and

protect their wealth against the impact of financial or political crises. A common technique used to circumvent currency restrictions is to ‘over-invoice’ imports or ‘under-invoice’ exports. The primary method used is the falsification of import and export invoices. By comparing discrepancies between the value of exports reported by a country and the value of imports reported by its key trading partners, the quantum of money transferred from that country through the use of the international trade system can be estimated.

In the case of transfer pricing, the reference to over- and under-invoicing relates to the legitimate

allocation of income between related parties, rather than customs fraud. In many cases, this can also involve abuse of the financial system through fraudulent transactions involving a range of money transmission instruments, such as wire transfers. In practice, strategies to ‘launder’ money usually combine several different techniques. Often these involve abuse of both the financial and international trade systems.

The basic techniques of trade-based money laundering include:

(a) ‘Over-Invoicing’ and ‘Under-Invoicing’ of Goods and Services: Money laundering through the over-invoicing and under-invoicing of goods and services, which is one of the oldest methods of fraudulently transferring value across borders, remains a common practice today. The key element of this technique is the misrepresentation of the price of the good or service in order to transfer additional value between the importer and exporter. Over-invoicing of exports is one of the most common trade-based money laundering techniques used to move money. This reflects the fact that the primary focus of most customs agencies is to stop the importation of contraband and ensure that appropriate import duties are collected.

(b) Multiple-Invoicing of Goods and Services: Another technique used to ‘launder’ funds involves issuing more than one invoice for the same trade transaction. By invoicing the same good or service more than once, a money launderer or terrorist financier is able to justify multiple payments for the same shipment of goods or delivery of services. Unlike over-invoicing and under-invoicing, it should be noted that there is no need for the exporter or importer to misrepresent the price of the good or service on the commercial invoice.

(c) Over-Shipment and Under-Shipment of Goods and Services: In addition to manipulating export and import prices, a money launderer can overstate or understate the quantity of goods being shipped or services being provided. In the extreme, an exporter may not ship any goods at all, but simply collude with an importer to ensure that all shipping and customs documents associated with this so called “phantom shipment” are routinely processed. Banks and other financial institutions may unknowingly be involved in the provision of trade financing for these phantom shipments.

(d) Falsely Described Goods and Services: In addition to manipulating export and import prices, a money launderer can misrepresent the quality or type of a good or service. For example, an exporter may ship a relatively inexpensive good and falsely invoice it as a more expensive item or an entirely different item. This creates a discrepancy between what appears on the shipping and customs documents and what is actually shipped. The use of false descriptions can also be used . 

Misuse of export promotion schemes such as drawback, Duty Entitlement Pass Book (DEPB),

Duty Free Import Authorization (DFIA), Vishesh Krishi Gram Upaj Yojana (VKGUY), etc. also lead to generation and flow of ‘black’ money. Several cases of forgery of export promotion scheme scrips / licences, meant to claim duty exemption in imports have been detected, which highlight another aspect of ‘black’ money generation and movement.

Smuggling of goods and contraband items, FICN, drug trafficking, arms deals and other illegal activities thrive on ‘black’ money. Illegal trade and movement of such goods is facilitated by the use of black money and in turn generates more ‘black’ money. These activities, by their very nature, are clandestine and can only operate through the use of ‘black’ money. All the activities associated at each and every level of smuggling and illegal trade in such goods generate ‘black’ money which forms a part of the ‘parallel’ economy.

Indigenous manufacturing activities and units are also important areas for the generation and

movement of black money. Many of the small manufacturing units are illegal and the manufacturing activity is never reported. All related transactions are in cash. Clandestine removal of goods from the Central Excise registered units and the production and distribution of goods in the unorganized sector is another source of generation of black money at the domestic level and leads to tax evasion. Misuse of CENVAT is another major area which accounts for significant evasion of tax and illegal movement of goods and generation of false invoices.

Evasion of service tax and generation and movement of money in the services sector is also an

area which needs to be examined in detail. Payments for majority of the services are still made in cash and many such payments are not accounted for and no bill is issued against the provision of such services, thereby facilitating the generation and flow of ‘black’ money. The magnitude of ‘black’ money involved in such cases is expected to be huge as the sheer number of such service providers and their consumers is very large.

NPO SECTOR

Misuse of tax exemption provisions under sections 10(21), 10(23C) & 11, and manipulations in

the claims of deductions, especially under sections 35 and 80G of the Income Tax Act are among the sources of generation of black money. India is a member of the Financial Action Task Force (FATF), an intergovernmental body which develops and promotes policies to protect the global financial system against money laundering and financing of terrorism. One of the areas of focus of FATF is safeguarding Non-Profit Organisation (NPO) sector from risk and misuse in money laundering and terror financing.

PARTICIPATORY NOTES

A Participatory Note (PN) is a derivative instrument issued in foreign jurisdictions, by a Foreign

Institutional Investor (FII) / sub-accounts or one of its associates, against underlying Indian securities. PNs are popular among foreign investors since they allow these investors to earn returns on investment in the Indian market without undergoing the significant cost and time implications of directly investing in the India. These instruments are traded overseas outside the direct purview of Securities & Exchange Board of India (SEBI) surveillance thereby raising many apprehensions about the beneficial ownership and the nature of funds invested in these instruments. Concerns have been raised that some of the money coming into the market via PNs could be the unaccounted wealth camouflaged under the guise of FII investment. SEBI has been taking measures to ensure that PNs are not used as conduits for black money or terrorist funding. As per SEBI regulations, PNs can be issued to only those entities that are regulated by an appropriate regulator in the countries of their incorporation and are subject to compliance of “Know Your Client” norms. FIIs are also required to declare that these PNs have not been issued to Indian residents or non-resident Indians. Entities issuing PNs are required to submit to SEBI a monthly report which includes details of subscribers and details of securities underlying PNs. Though, the information sought from FIIs issuing PNs are being submitted regularly, the reporting requirements mandated by SEBI presently do not capture details of ultimate beneficial owners of these instruments.

EXTENT OF BLACK MONEY IN INDIA AND ABROAD

1.One of the methods is the input / output method. Therefore, where the input-output ratio is known, the output can be estimated. The method consists of using this ratio along with the input to calculate the true output. When this is compared with the declared output, the difference between the true output and the declared output represents undisclosed output of the shadow economy. This method is deceptively simple and, though it may apply more appropriately to the industry sector, ignores the fast changing technological breakthroughs, which in turn contribute to the changing output input ratios. The method is difficult to apply in the context of countries where the tertiary sector grows at a faster pace compared to the primary and secondary sectors.

2.There is another approach – that of the monetarists, which is based on the fact that money is

needed to circulate incomes in both ‘black’ and the ‘white’ economy. As the official economy is known, the difference between this amount and the money in circulation could be assumed to be the circulating ‘black’ component. In one model, the velocity of money (that is to say the number of times currency moves in a year) enables the estimation of income circulated annually. A comparison of this with the income captured in National Accounting System (NAS) gives the income not captured, which is the ‘black’ income generated. The assumption that NAS represents ‘white’ incomes is not always true – all incomes which are not captured in NAS are not ‘black’ incomes – for instance, incomes of the large unorganized sector.

3.The Survey Approach represents yet another method, wherein sample surveys are carried. They may be on the consumption pattern of a representative sample, which is then compared with the total consumption of the country. Sometimes, such surveys are carried to check illegal activities prevalent in a certain sample. In this method, the problems are of a truly representative sample, unambiguous set of questions, the willingness of persons in the sample size to reveal true facts implying a certain comfort level with the interviewers – as no one wants to admit any illegality before strangers.

4.There is also the ‘fiscal approach’ method, the underlying basis of which is that the economy

comprises of several sectors, with each having its own sets of practices. The contribution of these sectors is separately worked, which when added would give the size of the entire ‘black’ economy. However, the manner of identifying the ‘black component’ in these sectors and assumptions suffer from inherent subjectivity of the researcher. This method has been used in various surveys.Wanchoo Committee’s estimate   1968-69 can be estimated at a figure of Rs.1,800 crore.

Rangnekar’s estimate The projections of ‘black’ income for 1968-69 and 1969-70 were Rs.2,833 crore and Rs.3,080 crore respectively.

Chopra’s estimate

The crucial finding of Chopra’s study is that after 1973-74, the ratio of unaccounted income to

assessable non-salary income has gone up, whereas the Wanchoo Committee assumed this ratio to have remained constant. As a consequence, after 1973-74, there is wide divergence between the estimates of Wanchoo Committee and those of Chopra. Chopra also corroborates the hypotheses that tax evasion is more likely to be resorted to when the rate of tax is comparatively high. His findings also support the hypothesis that increase in prices leads to an increase in unaccounted income. Further, he has given a significant finding that funds are diverted to non taxable agriculture sector, to convert unaccounted (black) income into legal (white) income. Chopra’s study estimated unaccounted income to have increased from Rs.916 crore in 1960-61, i.e. 6.5% of Gross National Product (GNP) at factor cost, to Rs.8,098 crore in 1976-77 (11.4% of GNP).

NIPFP Study on Black Economy in India

total black income generation of Rs. 36,784 crore or in round numbers Rs. 37,000 crore out of a total GDP at factor cost of Rs. 1,73,420 crore seems to be on the high side, although it turns out to be less than 30 per cent of GDP as against some extravagant estimates placing it at 50 or even 100 per cent of GDP. Taking out lower estimate, what we would say with some degree of confidence is that black income generation in the Indian economy in 1983-84 cannot be placed below 18 per cent of GDP at factor cost or 16 per cent of GDP at market prices.”

V. EXISTING LEGAL PROVISIONS AND ADMINISTRATIVE MACHINERY

TO DEAL WITH BLACK MONEY

LEGAL PROVISIONS

1.Income Tax Act, 1961

2.Wealth Tax Act, 1957

3.Benami Transactions (Prohibition) Act

4.Foreign Exchange Management Act (FEMA), 2002

5.Prevention of Money Laundering Act (PMLA), 2002

6.Customs & Narcotic Drugs and Psychotropic Substances (NDPS) laws

7.Prevention of Corruption Act & United Nations Convention Against Corruption (UNCAC)--The Prevention of Corruption Act, 1988

ADMINISTRATIVE MACHINERY

The principal agency to tackle the generation and control of ‘black’ money is the Central Board of Direct Taxes (CBDT), which deals with all direct taxes. The CBDT – including its Commissionerates and Directorates of Investigation, International Taxation, Transfer Pricing, Exemption, Intelligence and Criminal Investigation, etc. – is responsible for administration of direct tax laws;

the Central Board of Excise and Customs (CBEC), including Commissionerates of Customs, Central Excise and Service Tax; DRI, DGCEI,etc., implements indirect tax laws relating to customs, central excise, service tax, etc. Other concerned agencies are: Central Bureau of Narcotics (CBN) which regulates the production and sale of narcotics;

Directorate of Enforcement (ED) which enforces the Prevention of Money-Laundering (PMLA) and Foreign Exchange Management Act (FEMA);

Central Economic Intelligence Bureau (CEIB) which is tasked with ensuring proper sharing and analysis of economic intelligence; and

Financial Intelligence Unit (FIU-IND) which collects and analyzes data from the banking and financial sector.

Other central organizations such as Narcotics Control Bureau (NCB) under the Ministry of Home Affairs;

Serious Frauds Investigating Office (SFIO) and Registrars of Companies under the Ministry of Corporate Affairs;  and regulators such

as RBI, SEBI, FMC, IRDA, TRAI, etc., also contribute to formulation and implementation of the regulatory framework that helps check generation of black money and growth of black economy. Sales Tax departments of various state governments implement VAT in the states.

2.Effective implementation of the laws lie not only in the individual laws by the concerned agencies, but also proper inter-agency coordination especially where one law overlaps another law, and its administrative machinery affects the other. Lack of coordination, or even conflict of interest, is the second major problem to be tackled.

Another area of focus for inter-agency cooperation is information-sharing.

This matter is also receiving attention in many a fora and it is noted that information exchange has to become more professional. The EIC in the Ministry of Finance oversees intelligence sharing among different central economic intelligence and enforcement agencies through CEIB and Regional Economic Intelligence Committees (REICs).

3.Generation of black money from legitimate activities, such as businesses or professions, nonreporting of income, overstated expenses, etc., undermines the economy, its tax-base and the rule of law, and creates inequalities. The way to fight this menace is through comprehensive and better reporting mechanism, data-mining and analysis.

4.The Central Vigilance Commission (CVC) is the principal central government anti-corruption

watchdog; with anti-corruption units of the Central Bureau of Investigation (CBI) as its principal implementing arm. Vigilance department / bureau of different state governments are anti-corruption bodies in respect of employees of the state government. In some states, the institution of the Lokayuktas is also in place. Besides these institutions, the C&AG provides oversight for the central government and central PSUs, while the State AG provides the same for the state government and its organizations. Of late, the C&AG has become proactive and as a result several ‘scams’ have surfaced in the public domain. However, fact remains that although the C&AG or state AGs have been functioning for several decades, leakages in public expenditure has continued unabated. Both oversight and enforcement mechanisms against corruption need to be strengthened.

VI. MEASURES TO TACKLE BLACK MONEY

There are two dimensions of the issue of black money –

first, its generation and, second, its consumption and use, including laundering of black money back to mainstream economy.

Dealing with this menace has to cover both these aspects. So far as generation of black money from crime or corruption is concerned, its remedy does not lie merely in legislative or enforcement domains but also in finding much deeper socio-economic solutions.

Further, consumption and laundering of black money, if effectively tracked and controlled, may have the ‘squeeze effect’ on the overall activities resulting in creation and sustenance of black economy. While there may not be any need to have new law to especially deal with black money

and black economy, various existing laws need to be comprehensively reviewed by the concerned

administrative ministries on a regular basis keeping in view the changing economic scenario, and provisions dealing with violations need to be strengthened accordingly.

Strategy to tackle black money

The Committee has identified following strategy to tackle black money:-

--Preventing generation of black money

--Discouraging use of black money

--Effective detection of black money

--Effective investigation & adjudication

--Other steps

Preventing generation of black money

1.India must ensure transparent, time-bound & better regulated approvals / permits, single window delivery of services to the extent possible and speedier judicial processes.

2.The fight against the monstrosity of black money has to be at ethical, socio-economic and

administrative levels. At the ethical level, we have to reinforce value / moral education in the school curriculum and build good character citizens, particularly highlighting the ills of tax evasion and black money. At the socio-economic level, the thrust of public policy should be to discourage conspicuous & wasteful consumption / expenditure, encourage savings, frugality and simplicity, and reduce the gap between the rich and the poor.

3.In order to ensure transparent and efficient allocation of natural and man-made resources, oversight in the form of comprehensive regulations and ombudsman for grievance redressal, particularly for scarce resources – as in land, minerals, forests, telecom, etc. – need to be introduced and implemented expeditiously.

4.Social sector schemes involving huge public expenditure under various programmes reportedly

suffer from possible manipulations and leakages. Direct transfers to the accounts of beneficiaries can provide a solution, as it would prevent manipulations like bogus muster rolls, etc. While efforts such as UID and direct transfer of subsidies will stop leakages in some sectors, in other sectors the problem will have to be addressed differently. We, accordingly, recommend that social audit be made mandatory for all social sector schemes that do not involve direct transfer of credit to the bank account of the beneficiary, at the district / field level, and a second and subsequent AG audit at the HQ level. We also recommend that a system of random inspections by teams of sponsoring Ministry / Department / Agency may monitor utilization of public funds for social sector schemes.

5.There should be a dedicated training center for all law enforcement agencies dealing with financial crimes and offences, as this requires special skills.

6.Oversight in the private sector is almost absent, except for some professionally managed companies. It mainly consists of self-regulation, and audit under the Company and Income Tax laws. That the system of professional audit may be quite ineffective even in professionally managed enterprises is aptly demonstrated by the Satyam case. We are of the view that the burden of dual audit should be reduced to single audit (for both company and tax law) and the audit system be detached from the management and control of the business. We, therefore, recommend that the central government establish a regulator (under Company law / Income Tax law) to empanel auditors in different grades and randomly assign them to the private sector firms, based on category and payment capacity, with mandatory rotation and maximum tenure of two years.

7.The proposed national level GST regime should be expeditiously implemented, as the spin-off

from its implementation would provide adequate resources to more than compensate the loss apprehended by certain state governments.

8.At present, no government agency has complete database of NPOs. CBDT has the largest database about this sector. There may be information with other agencies such as MHA, CEIB, etc. It is desirable that CBDT be assigned the role of a centralized agency with which every NPO would require to be registered and would be allotted a unique number. This would be in line with the decision taken by the Government in the light of possible misuse of the sector in undesirable activities. There are suggestions made by the NPO Sector Assessment Committee, an Inter-ministerial body, which should be accepted and the office of DGIT (Exemption) appropriately strengthened in terms of manpower, infrastructure and capacity building.

9.There should also be sharing of real-time data under Foreign Contribution Regulation Act (FCRA) and DGIT (Exemption) and coordination amongst various enforcement agencies.

10.Accountability of both public and private offices needs to be enhanced. As we are mainly concerned here with public sector accountability, we recommend that apart from good practices being followed such as Fiscal Responsibility and Budget Management (FRBM) Act and outcome budget, performance-linked appraisal system of rewards and punishments, already under consideration, should be expeditiously implemented.

Discouraging use of black money

1.Government may consider amending existing laws (The Coinage Act 2011, The Reserve Bank of India Act 1934, FEMA, IPC, Cr PC, etc.), or enacting a new law, for regulating the possession and transportation of cash, particularly putting a limitation on cash holdings for private use, and including provisions for confiscation of cash held beyond prescribed limits. This would address the concerns expressed by various courts, and also the Election Commission of India for reducing the influence of money power during elections.

2.To reduce the element of black money in transactions relating to immovable properties, provision for NOC should be introduced in the Income Tax law with safeguards to reduce administrative complicationsand increased ease of compliance, so that an appropriate and uniform data-base is also set up, and a proper national-level regulation is put in place. The new system should be computer driven with minimal interface between the tax authorities and the tax-payer, and enforced by a dedicated unit within the investigative machinery of the Income Tax Department on the basis of pre-determined parameters and standard operating procedures. The electronically generated NOC, within a specified period, would also act as a tax clearance certificate.

3.The Accounting Standard No.7 should be modified by the ICAI to be made applicable to real

estate developers also.

4.There is no uniformity in the matter of levy of agricultural income tax among states. Agriculture generates around 14 per cent32 of the country’s GDP. Giving credit to agricultural income for income tax purposes without verification of claim allows an avenue for bringing black money into the financial system as agricultural income. State governments may consider levy of agricultural income tax with facility for computerized processing and selective verification. This will on the one hand enhance revenues of state governments, and on the other hand prevent laundering of black money in the garb of agricultural income.

Effective detection of black money

1.The regulation and enforcement of KYC norms in the co-operative sector may be strengthened by the State Governments as well as the Central Government. Responsibility may be fixed for any lapse in this regard, as well as for any subsequent failure to alert authorities as regards any suspicious transactions in such accounts.

2.The RBI could consider stricter implementation of KYC norms and limit number of accounts that can be introduced by a single person, the number of accounts that can be maintained in the same branch by any entity and alerts about same address being used for opening accounts in different names. Stricter adherence to, and enforcement of, KYC norms is needed for ensuring proper compliance by banks and financial institutions. The Government, as well as the RBI, also need to put a better regulatory framework in place and act promptly against errant persons / institutions.

3.The Ministry of Corporate Affairs, which already has a centralized data-base of all companies,

may examine placing a cap on the number of companies operating from the same premises and number of companies in which a person can become director.

4.The government may consider introducing alternative financial instruments to reduce the attraction of gold as savings instrument.

5.Better reporting / monitoring systems are to be put in place to trace the dealings in bullion /

jewellery through the Income Tax / Customs / Sales Tax Acts.

6.Use of banking channels and credit / debit cards should be encouraged, while trade practices

such as cheque discounting should be discouraged.

7.Income Tax Department, which has a large data-base of financial transactions, should immediately set up the Directorate of Risk Management for proper data mining and risk analysis. The third-party reporting mechanism of the Income Tax Department should be made computer-driven and cover most high-value transactions in the financial sector.

8.Foreign remittances using corporate structures and the formal financial sector instruments may

be a popular method of transferring funds (even of illegal origin) to foreign jurisdictions or for routing back to India through Foreign Institutional Investors (FII).

9.The oversight mechanism for the financial markets must have trained manpower with proper

domain knowledge of financial investigation. This will involve placing officials from the financial investigative agencies in the operations / vigilance machinery of the banks and financial institutions to keep proper vigil and ensure that rules and regulations are followed in the banks and other financial institutions.

10.entities operating in India to report all global transactions above a threshold limit.

11.In India, there is no law to protect informants / whistle-blowers, nor does any department have

effective witness protection program. As a result, credible information is not forthcoming and witnesses either do not turn up or turn hostile resulting in acquittals in prosecution cases. Apparently, the National Investigative Agency runs a program, and the recently created Directorate of Criminal Investigation (DCI) in the CBDT has been empowered to run such a program. Accordingly, we recommend that a witness protection law may be enacted expeditiously and witness protection program should be implemented by all law enforcement agencies.

Effective investigation & adjudication

1.mitigate the manpower shortage issues which are seriously hampering the functioning of various agencies particularly the CBDT and CBEC. Further, both Boards have submitted proposals for restructuring of their respective field formations. These need to be taken up and implemented on a fast track basis to show the Government’s resolve to tackle the issue of black money.

2.Simultaneously, more administrative and financial autonomy must be expeditiously devolved on CBDT and CBEC for formulating tax policies in keeping with the overall government views on economic growth and development, for better tax administration and for providing tax-payer services as per best international practices.

3.With the emergence of complex legal matrix, infraction of one law invariably leads to infraction of another. Inter-agency coordination is critical in the fight against black money. There is a need to evolve an effective coordination mechanism that identifies the laws violated, the law violators, and a permanent joint mechanism to investigate all such cases.

4.The information and intelligence gathering mechanisms of various economic agencies need to be more broad-based so that the entire gamut of economic activity is captured in an electronic manner, mined and analyzed. All the agencies need to continuously get technologically upgraded in this area to effectively tackle the menace of black money. The skills of manpower resources available with the agencies also need to be upgraded continuously and exposed to the global best practices in their sphere of work.

5.Intelligence sharing is one of the most critical areas for effective law enforcement. For this purpose, there should be a platform for more effective sharing of intelligence / information.

6.For curtailing TBML, there should be institutional arrangement for examining cases of mismatch

between export and corresponding import data, as done by the Data Analysis & Research for Trade Transparency System (DARTTS) of US Customs. Indian Customs should set up a Trade Transparency Unit (TTU) on these lines for which appropriate legal framework may be introduced.

7.Effective battle against black money cannot be ensured unless the judicial machinery to deal with it is specialized and the trial of offences is expeditious and punishments exemplary. The legal support to various law enforcement agencies should be enhanced. All financial offences should be tried through fast track special courts.

8.Therefore, the offence of providing fake bills and entries should be dealt with firmly.

9.As taxation is a highly specialized subject, most reversals in court rulings are to be found in tax

jurisprudence. Government may consider creating an all-India judicial service for specialized judiciary in different laws to achieve uniformity of application.

10.The National Tax Tribunal is yet to come into existence.

11.Improvements in the matter of reporting, analysis and communication need to be achieved by

further upgrading the computerization programme of the judicial system. It will enable the law enforcement agencies in taking well informed decisions.

Other steps

1.Directorate of Currency (DoC) may be strengthened to introduce coins and currencies that would be machine readable, to enable routing of cash transactions through banks easy, user-friendly and reduce the menace of FICN.

2.To prevent misuse of ‘off-market’, and ‘Dabba-trading’ or trading outside the recognized stock

exchanges, amendment to income tax law may be introduced to allow losses in off-market share

transactions to be set off only against profits derived from such transactions.

3.As housing finance companies and the property buyers are provided fiscal incentives, it also leads to speculation and flipping transactions. To prevent this, Section 54 of the Income Tax Act should be amended to provide for availing this benefit only twice by a taxpayer in his lifetime.

4.The period of limitation for reopening income tax assessments should be enhanced from present

six years to sixteen years for bringing to tax undisclosed assets held abroad. 

‘India, Switzerland studying ways to share info on black money’

India and Switzerland are discussing ways of sharing information on specific accounts relating to black money stashed away in the European nation, Finance Minister P Chidambaram said.

The Minister said that he received a reply on his letter from his Swiss counterpart and would send India’s response in the next few days.

In his two-page letter to the Swiss Minister in March, Mr. Chidambaram threatened to drag the European nation to multilateral fora like G20 for continuing to block India's requests.

Mr. Chidambaram also reminded her of the April 2009 declaration adopted by G20 leaders stating that the “era of bank secrecy is over.”

Mr. Chidambaram had said Switzerland did not honour the terms of the Double Taxation Avoidance Agreement between the two nations, under which information about Indians with accounts in Swiss banks has been sought by the tax authorities.

A formidable task

By appointing a Special Investigation Team to unearth black money stashed away in tax havens abroad, the Narendra Modi government has signalled its intention to pursue in right earnest a matter that the Bharatiya Janata Party has been talking about for years. The United Progressive Alliance regime had been dragging its feet on implementing a July 2011 Supreme Court order to form such a team, and even made a vain bid to stall a court-monitored investigation on the plea that it would erode the authority of the executive. Its stand had given the impression that the previous government — despite its active partnership with other countries in global efforts to get evasion-friendly jurisdictions to shed their obsession with banking secrecy — was not serious about retrieving ill-gotten wealth deposited abroad. The SIT is a high-level committee named by the Supreme Court and is headed by Justice M.B. Shah, a former judge of the Court, with another former apex court judge, Arijit Pasayat, as vice-chairman. It is an inter-agency group that includes the Secretary, Department of Revenue; the Deputy Governor of the Reserve Bank of India, and the heads of the Intelligence Bureau, the Research and Analysis Wing, the Enforcement Directorate, the CBI, the Central Board of Direct Taxes and a few other agencies. Its primary responsibilities include the investigation and prosecution of cases involving unaccounted money.

However, the task is not easy. Mr. Justice Shah himself has spoken about the complexities involved. For one thing, there is no clear estimate of the quantum parked in overseas bank accounts, and it is not known whether all the money that is said to have gone out of the country had not returned in some form through ‘round-tripping’ or participatory notes, or investments in the name of entities and individuals hiding under layers of corporate cover. The government’s 2012 white paper on black money put the amount that Swiss banks owed to India in 2010 at 1.95 billion Swiss Francs, or 0.13 per cent of its total liabilities towards all countries, suggesting that estimates in the range of tens of thousands of crores of rupees may be exaggerated. The SIT must be prepared for the long haul, as its investigation will have to take into account the provisions of existing double taxation avoidance or taxation information exchange agreements that come with a heavy responsibility on recipient-states to limit the use of such information to deciding taxation issues alone. A set of global standards evolved by the OECD on ‘Automatic Exchange of Information in Tax Matters’ is likely to come into force around 2017, and it may be possible for countries like India to obtain information related to bank account balances, interest and dividends so that they could compute capital gains on these sums. Whether the arrangement will result in repatriation of such money is, however, anybody’s guess.

CBDT to anchor SIT probe into black money

The SIT probe into black money stashed away abroad will be anchored by the Central Board of Direct Taxes. The core group will have a team at its disposal for smooth coordination with various departments for joint investigations.

According to government sources, the black money issue is an offshoot of income-tax jurisdiction and therefore, the CBDT would play a pivotal role in the entire process. “The body has a large database on individuals and corporate entities with respect to unaccounted money. It has access to bank account details. One of the feasible ways to unravel the money trail is to begin with suspected tax evaders and probe their transactions,” said an official, adding the modalities would be discussed when the Special Investigation Team met.

Cases of suspected foreign exchange violations would apparently be handed over to the Enforcement Directorate.

The SIT, headed by Justice M.B. Shah and mandated to take over all black money cases, supersedes a high-level committee formed earlier under the Revenue Secretary on the same issue.

According to its order, the SIT will take over investigations against individuals having accounts in Liechtenstein banks, whose names were disclosed by Germany. It would also review concluded matters and prepare a comprehensive action plan to unearth black money stashed away in foreign banks.

The SIT, with Justice Arijit Pasayat as vice-chairman, comprises the Revenue Secretary, the RBI Deputy Governor and heads of the CBDT, the Intelligence Bureau, the ED, the Central Bureau of Investigation, the Research and Analysis Wing, Revenue Intelligence and Financial Intelligence.

SIT on black money charts road map

The Special Investigating Team on black money held its first meeting on Monday under the chairmanship of Justice M.B. Shah, a former judge of the Supreme Court.

The SIT members decided the road map and detailed modalities of proceeding further in accordance with the Supreme Court mandate, according to an official release. The Narendra Modi government had constituted the SIT to implement the decision of the apex court to probe large amounts of money stashed abroad by tax evaders. The ambit of the SIT also covers the funds generated through unlawful activities and salted away in overseas havens.

On Thursday, the Finance Ministry had notified the terms of reference of the SIT. The SIT will take over all other investigations that already under way and are pending or awaiting to be initiated, with respect to any other known instances of the stashing of unaccounted monies in foreign bank accounts by Indians or other entities operating in India, according to the notification.

Thursday’s notification does not specifically mention the SC’s directive that the SIT will take over the matter of investigation of the account holders in Liechtenstein banks whose names were disclosed by Germany and review the concluded matters also assess whether the investigations carried so far were “thoroughly and proper conducted or not, and on coming to the conclusion that there is a need for further investigation shall proceed further”.

On May 1, the Centre had reported to the apex court that investigations had been concluded against 18 of the 26 individuals that had bank accounts in Liechtenstein. It also said that these names were received from Germany and investigation had concluded in 17 cases of which against eight no evidence was found and the investigation had been concluded against them.

“Technically the terms of reference should have included reopening of these cases also to assess whether everything was properly done and if there is any need to proceed further… However, I hope the SIT in its wisdom will interpret its mandate broadly to cover these directions as well and make up for what probably is an omission due to oversight,” said RTI Activist Venkatesh Nayak in a statement on Sunday.

SIT draws up roadmap to retrieve black money

New Delhi: TIMES NEWS NETWORK





The Special Investigation Team set up to probe black money stashed by Indians abroad held its first meeting on Monday during which the roadmap on how to proceed was decided and all agencies were asked to give inputs on black money cases.Sources privy to the meeting said the SIT headed by former Supreme Court judge Justice M B Shah decided to examine whether some of the black money cases could be put on fast-track. After nearly two hours of deliberations, the finance ministry came out with a brief statement saying that “during the meeting, detailed modalities of proceeding further with the Supreme Court mandate were discussed and the roadmap decided“.
Without elaborating on the roadmap, the statement said the next meeting of the SIT would be convened shortly to take stock of follow-up action on the decisions taken at Monday' talks.
However, sources said agencies like Enforcement Directorate, CBI and other fi nancial probe agencies were asked to submit the number of black money and money laundering cases pending before them and the progress of the probe.
The meeting was chaired by Justice Shah and attended by former Supreme Court judge Justice Arijit Pasayat as vice-chairman and top officials of 11 high-profile agencies and departments including Intelligence Bureau, Research and Analysis Wing, CBI and ED.
According to sources, framing of policy for tackling the menace of black money and the status of ongoing probes and available inputs with all the departments in this regard were discussed.

Swiss Govt to Relax Rules for Assistance in Tax Evasion Cases

BERN/NEW DELHI PRESS TRUST OF INDIA





Facing global pressure, Switzerland on Monday decided to relax a key legislation to make it easier to extend help to foreign countries, including India, probing cases of suspected tax crimes.The proposed revision in Switzerland's Tax Administrative Assistance Act would do away with an existing requirement where all individuals are given prior information before any details about them are shared with a foreign jurisdiction for alleged tax crimes.
Besides, the amendment will make it easier for Swiss authorities to extend help in matters related to 'group requests'.
The revised Act would help India and many other countries who find it difficult to get information from Swiss authorities while probing cases of alleged tax evasion through foreign shores including Switzerland.
This comes at a time when a renewed debate is underway in India about efforts to act against those alleged to have stashed black money in Swiss banks.
The Swiss government further said no referendum has been called against the bill as yet and the referendum deadline will expire on July 10, 2014. “If that remains the case, the amended Act will enter into force on August 1, 2014,“ it added.
The Swiss Parliament had approved the revision of the Tax Administrative Assistance Act in March this year.
The amendment includes a new provision that envisages a procedure with, in exceptional cases, deferred notification of persons entitled to appeal, as well as more precise specifications regarding group requests.
“Switzerland will thereby comply with the applicable international standard for administrative assistance in tax matters as well as an additional recommendation of the Global Forum on Tax Transparency,“ the government said. The revision makes provision for affected persons to be notified only after information has been disclosed to the requesting state's authorities in urgent cases -or the cases when prior notification would compromise the investigation. Besides, the revised Act would also make it easier for Swiss authorities to provide 'administrative assistance' to foreign countries in cases of 'group requests'.
While requests for individual cases have been handled in a relatively effective manner, the existing rules in Switzerland put some restrictions on assistance in 'group requests' or regarding cases where help is sought by foreign countries for a group of persons or a group of related cases together.





Foreign Accounts are No Gold Mine





Focus on stopping generation of black money

Switzerland has reportedly agreed to share information on Indians who have stashed money away in Swiss banks. Such cooperation reflects G20 and OECD efforts to clamp down on tax havens and India must work to bring more jurisdictions into a cooperative mood. 

However, foreign deposits of Indian money are unlikely to open up any gold mine. India’s exposure to Swiss banks at SFr 2.03 billion, or .`14,000 crore, is a minuscule proportion of the estimated total foreign client money of $1.6 trillion in Switzerland. 

While large amounts of black money do leave India, they probably also round-trip back to India, to reap the riches of a fast-growing economy.The point is to create institutional reforms that remove the incentive to generate unaccounted income.
--Lower the tax rates and widen the base.
---Make refunds and tax administration taxpayer-friendly.
---If the cost of compliance is far higher than the cost of non-compliance, the tendency would be to not comply.
---Switch over to a goods and services tax. It will establish an audit trail of value addition and income across the production chain and create a unified database of tax potential that can be tapped to curb tax evasion.
---Clean up real estate, the biggest repository of unaccounted incomes. Convert stamp duty into a service tax eligible for input tax credit.
---Notify the law on benami transactions.
---The biggest reform needed is to make political funding transparent. So long as political funding remains non-institutional and opaque, businessmen will feel obliged to generate black money to grease the wheels of the political machinery.
All political expenditure should mandatorily be disclosed every month, scrutinised, challenged and finalised.The party must then show source of income to finance the expenditure. Such reform, admittedly tougher than chasing after dark secrets in Alpine towns, is likely to produce lasting results.