On 19th March, the Finance Minister Mr. Arun Jaitely introduced in the Parliament “The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015”. The Statement of Objects and Reasons records that “Evasion of tax robs the nation of critical resources necessary to undertake programmes for social inclusion and economic development. It also puts a disproportionate burden on the honest taxpayers as they have to bear the brunt of higher taxes to make up for the revenue leakage caused by evasion.” It further states “ The central government is strongly committed to the task of tracking down and bringing back undisclosed foreign assets and income which legitimately belong to the nation. Recognising the limitations of the existing legislation, it is proposed to introduce a new legislation to deal with undisclosed assets and income stashed away abroad”.
The Finance Minister deserves to be congratulated on the introduction of the Bill. The siphoning off of funds and wealth created by evading taxes has been a disease our country suffered from even prior to the independence. In the postindependence era, the menace increased exponentially in a regime where tax rates were astronomically high, there was distrust between the taxpayer and the tax collector, and being wealthy was virtually a sin. By the time tax rates were rationalised, the disease had reached epidemic proportions, so that normal palliative medicine was of no use and a drastic surgery was necessary. The Bill which some view as harsh and irrational must be looked at in this background.
The estimates of illegal or “black” money which was kept in undisclosed accounts with foreign banks varied significantly. The CBI director stated in 2012 that the estimate was US dollars 500 billion. Finally, the judiciary stepped in and ordered the formation of a Special Investigation Team (SIT). It would be appropriate to note the anguish of the judges of the Supreme Court Justice B. Sudershan Reddy and Justice S.S. Nijjar who, while ordering the constitution of the SIT, remarked ”The issue of unaccounted money held by nationals and other legal entities in foreign banks is of primordial importance to the welfare of the citizens. The quantum of such monies may be rough indicators of the weakness of the state, in terms of both crime prevention and also of tax collection”. Finally, the government prodded by the Supreme Court has acted and the Bill has been introduced.
One may wonder as to why, if the source of ill-gotten wealth is in our country, the government should go after only that wealth that is lying in foreign countries. While undoubtedly the war against black money should continue in earnest on the domestic front, if one were to prioritise the efforts of the government in checking or mitigating this problem, beginning the battle against tax evasion with an attack on undisclosed foreign assets is probably justified. The first reason for this is purely economic. If income or assets on which tax has been evaded lie within the country, normally they circulate through distribution channels albeit unofficial. Therefore, if wealth resides in the country, it is more often than not distributed among different people though the distribution may be grossly unequal. Consequently, to an extent, such moneys gives a fillip to economic activity. On the other hand, once money is secreted abroad, it remains in a foreign economy with virtually no benefit to our country.
Secondly, if unaccounted wealth is within India the possibility or probability of it getting converted into disclosed wealth either voluntarily, or through detection is much stronger. Once black money is transported out of the country, the trail goes weak and then turns cold. In an attempt to detect such money, one may face a maze of legal issues and the success rate of such efforts is not encouraging.
Thirdly, such money often enters India, through a facade and is often hot money, leaving Indian shores at the slightest hint of economic turbulence. This affects a developing economy like ours. Finally, such wealth is often used by the underworld or terrorist organisations to wage an undeclared war on India. For all these reasons I believe that the Finance Minister has got his priorities right.
At first blush, the Bill seems to be fairly harsh. Perhaps, that is the intent. It seeks to tax the foreign undisclosed asset at the value in the year in which it comes to the notice of the assessing officer. If one aggregates the tax payable along with the penalty, an assessee would have to shell out 120%. While no one can defend a flagrant violation of the law, taxation on the basis of the value of the asset may result in a number of problems.
Further, there is no provision for stay of recovery of the tax and penalty, even though one may have filed an appeal against a manifestly erroneous demand. There are other glitches as well, which may possibly be ironed out in the course of the passage of the Bill becoming an Act. More importantly what needs to be addressed is the wantonly aggressive stand of the tax authorities in the recent times. While a person who evades taxes must undoubtedly be punished and should suffer, it is essential that an environment is created where compliance is rewarded, honesty is recognised and the treatment of a taxpayer is human. Those of my colleagues that were practising in the field are fully conscious of the tax terrorism that prevails. It is not sufficient only to say that the government wants a fair tax administration, action in that regard is necessary on the ground.
All in all, in its battle against black money, the government has taken the first step. Let us hope that this Bill is followed up with provisions to deter creation of ill-gotten wealth within the country. For the time being we can only say ” well begun is half done!”
