Indian move to check illegal capital outflows

THE BJP-led National Democratic Alliance government, which had made a lot of noise about black money and the illegal stashing of funds abroad in the run-up to general elections last year, finally got down to some serious work to tax ill-gotten wealth and curb its growth.

Last week, the government managed to get its crucial Undisclosed Foreign Income and Assets (imposition of tax) bill, 2015, passed by both the houses of parliament. Even the opposition parties led by the Congress, which have been stonewalling the legislative agenda of the government by disrupting parliament, agreed to back the move, considering the enormous public interest in the matter.

The union cabinet also approved a new version of the Benami Transaction (prohibition) bill, which aims to curb the generation of black money.

The bill, which amends the original act of 1988, envisages stringent punishment — including attachment and confiscation of benami (a fake transaction) properties — and imprisonment.

The Congress-led United Pro¬gressive Alliance (UPA) government had in 2011 introduced a bill to amend the 1988 act; it was referred to parliament’s standing committee, which gave its report, but it was not implemented and the bill lapsed after the dissolution of the lower house of parliament last year.

The two measures initiated by the NDA government are expected to curb the flow of illegal wealth outside the country and also its generation within India in due course. Arun Jaitley, the finance minister, noted that the government would provide ‘a compliance window’ to resident Indians having accounts in foreign banks, which he clarified, was not an amnesty scheme.

Those who have money in overseas accounts can declare their assets, pay an income-tax of 30pc, plus a penalty of 30pc and come clean on their overseas wealth

Those who have money in overseas accounts can declare their assets, pay an income-tax of 30pc, plus a penalty of 30pc and come clean on their overseas wealth.

But if they fail to do so, the new law — which will come into force after the President gives his assent — envisages 120pc tax and penalty, besides a 10-year jail term.

Jaitley also reminded those having overseas accounts that it would be virtually impossible for them

to hide their foreign bank details after 2017 when the new global standard on Automatic Exchange of Information (AEOI) comes into force.

The Global Forum on Trans¬parency and Exchange of Infor¬mation for Tax Purposes was set up by the OECD in 2000 to address risks to tax caused by tax havens. In 2009, it was restructured in response to suggestions by the G20 nations.

Today, the forum has 121 members and is the premier international body for ensuring the implementation of internationally agreed standards of transparency and exchange of information on tax requests.

The global standard on AEOI requires financial institutions including banks to report information on accounts held by non-resident individuals and entities (including trusts and foundations) to their tax administration, which then provides the information to the account holders’ countries of residence on an annual basis.

This would, for instance, ensure that any Indian passport-holder having a bank account in any of the countries that are signatories to the AEOI will not be able to hide details of the account from tax authorities at home.

THOUSANDS of affluent Indians have for decades been stashing wealth in tax havens around the globe.

Estimates of the amount of illegal financial outflows vary, but according to one credible source — US-based non-profit, Global Finan¬cial Integrity (GFI) — it added up to almost $440bn between 2003 and 2012.

GFI estimates that every year a trillion dollars flow illegally out of developing and emerging economies due to crime, corruption and tax evasion, which is much more than the amounts received by these countries through foreign direct investments and foreign aid combined.

In its latest report on ‘Illicit financial flows from developing countries: 2003 to 2012,’ GFI noted that Asia accounted for more than 40pc of total illicit flows from the developing world.

Trade mis-invoicing accounted for an average of 77.8pc of illicit flows.

India ranked fourth — after China, Russia and Mexico — with average annual illicit outflow of $43.96bn (making a total of $439.59bn during the 10-year period).

While in the past, governments justified their inaction in attempting to bring back the illicit wealth from abroad, citing secrecy surrounding such overseas accounts in tax havens, it has become increasingly difficult as most tax havens are now cooperating.

Several nations including the US and Germany have in recent years taken tough action against tax havens. Germany got hold of a CD containing names of account-holders in Liechenstein-based LGT Bank.

A bank employee also sold secret customer data to tax authorities in the US, the UK and other countries.

India had in 2010 revised the double taxation avoidance agreements (DTAAs) with many countries, enabling it to access names of Indians holding bank accounts in tax havens.

However, the authorities have refused to divulge the names of the account-holders as it would violate the confidential clauses in the DTAAs.

While India was initially reluctant to even get the names of Indians holding illegal accounts with LGT Bank, the UPA government was forced by the Supreme Court to set up a special investigation team (SIT), which had to report directly to the apex court.

The government was also directed to get the names from Germany and inform the SIT.

Last year, the NDA government, which finally set up the SIT, was forced to disclose the names of Indians with illegal overseas accounts.

In 2011, India had obtained from French authorities the names of 628 individuals and entities with accounts in HSBC’s offshore private bank.

Earlier this year, following a probe by the International Con¬sortium of Investigative Journalists, the names of nearly 1,200 other Indians with accounts in HSBC’s private bank in Switzerland, was published.

Both Germany and the UK are believed to have objected to the publication of the names, as the information was shared on the basis of the revised DTAAs, which have a confidentiality clause.

There are fears that the flow of information from many countries about illegal bank accounts, will now come down drastically.

But with the AEOI coming into force soon, it really would not matter, as such information would be transmitted automatically to the Indian government.