There is no dearth of laws to tackle the problem of black money. But will India ever enforce them?

On 13 May 2015, before the Lok Sabha passed the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015, Finance Minister [Arun] Jaitley said the world was no longer “willing to tolerate tax havens which thrive on secrecy”. After the bill was passed, Prime Minister Narendra Modi tweeted that the new law was “historic”. But the government’s critics argue that the new law is going to be ineffective at best, or an eyewash at worst. The loudest criticism of the new law is that while it is meant to prosecute and punish Indians with illegal foreign incomes and assets, the much bigger problem of black money in the domestic economy has not been addressed.

In order to counter this criticism, the government introduced the Benami Transactions (Prohibition) Bill in the Lok Sabha the same day, within hours of its approval by the Cabinet. This bill, which targets domestic holders of black money, has been referred to Parliament’s Standing Committee on Finance. “Benami” is a north Indian term. A benami purchase of property means the purchase has been made in the name of someone other than the person who has financed the transaction (including friends and distant relatives or even fictitious persons). The de facto owner of such benami income or assets is legally known as a “beneficial owner”.

The bill proposes to amend the hitherto inoperative Benami Transactions (Prohibition) Act, 1988, by providing for strict penalties, including the attachment and confiscation of benami property, imposition of penalties of up to 25 per cent of the “fair market value” of the assets and rigorous imprisonment for up to seven years.

An earlier lapsed version of the bill had sought the imposition of either a fine or imprisonment as punishment; the new bill provided for both.

The property acquired in the name of a spouse and children or in the name of siblings would be exempt from provisions of the proposed law provided the property is jointly owned and funded through known sources of income. The bill has included in its purview transactions of not just immovable property, but also assets such as financial securities and gold.

Particular provisions of the new act and the bill raised doubts and apprehensions such as the provision to imprison those who fail to disclose their foreign asset holdings for up to seven years; that the “fair market value” of the asset would be assessed instead of its “acquired value”; that when computing the penalty payable, every person responsible for the workings of a corporate entity would be punishable, and; that tax recovery officers were being conferred with unbridled powers on the introduction of this new act.

Industry body, the Associated Chambers of Commerce and Industry (ASSOCHAM) raised concerns in a statement, part of which read: “If the value of the asset has appreciated over the years, the person making the declaration would become liable to pay tax on such unrealised appreciated value which would be substantially higher than the amount which the declarant would have invested.” Further, the bill provides that the tax recovery officer “can draw under his signature a statement of arrears of an assessee and it shall not be open to the assessee to dispute the correctness of any certificate drawn up by the officer on any ground whatsoever”. This has been perceived by ASSOCHAM to be excessively discretionary.

Despite this display of bravado, there is a strong likelihood that the new law cannot, and will not, be effectively enforced.

One reason for this is the ineptness of the country’s investigative and enforcement agencies. Scepticism on this score is strengthened by the fact that India already has in place laws dealing with tax evasion and money laundering, which are poorly enforced. Such laws include the PMLA [Prevention of Money Laundering Act], 2002, the FEMA [Foreign Exchange Management Act], 1999, and the Income Tax Act, 1961. Stringent enforcement of all these laws has been handicapped by gaping loopholes. In fact, the Indian government’s track record of launching prosecutions and levying penalties on those violating the PMLA and FEMA has been pretty abysmal.

The PMLA came into force with effect from 1 July, 2005. Yet, according to the finance ministry’s “White Paper on Black Money” (tabled in Parliament on May 21, 2012): “The directorate of enforcement has so far registered 1,437 cases for investigation under the PMLA. During investigation, 22 persons were arrested and 131 provisional attachment orders issued in respect of properties valued at Rs 1,214 crore. The directorate has filed 38 prosecution complaints in PMLA-designated courts for the offence of money laundering.”

The FEMA, on the other hand, came into force with effect from June 1, 2000. Between June 1, 2000 and March 31, 2012, while 23,118 cases were registered for alleged violations of the FEMA, only 4,819 show-cause notices were issued, 3,259 cases adjudicated, and penalties worth Rs 1678 crore imposed. According to Congress member of Parliament Shashi Tharoor, the act “completely overlooks the very poor quality of tax administration in this country”. He also raised “capacity issues, including a large number of vacancies in the Enforcement Directorate”.

In order to bring back black money stashed abroad, it is important to identify and block channels that facilitate the illicit flow of these funds. This is easier said than done. Though agreements relating to access to, and sharing of, information have been implemented between Switzerland and India, prosecution of those with illicit money takes time and diplomatic efforts since these agreements are not robust enough to facilitate the sharing of information automatically, and bureaucratic discretion is what often impedes the process.

This is unlike the FATCA [Foreign Account Tax Compliance Act] where the US receives the information it requires almost immediately, as happened in the instance where the United States Department of Justice (DOJ) penalised eighty Swiss banks to the tune of $1.3 billion. The banks agreed to participate in any criminal or civil proceedings, which the DOJ wished to pursue through its non-prosecution agreement with Swiss banks. Similarly, in 2013, two Swiss banks – Credit Suisse and Zurich Cantonal – sought permission from Swiss government authorities to share information of suspected clients who were involved in evading taxes, implying their interest in cooperating with the DOJ. Both banks sought permission to cooperate for two reasons: one, they would avoid paying penalties or facing criminal charges for assisting Americans to evade taxes; and two, because without permission from the authorities, the banks would be violating privacy rights.

Both instances show that for developed countries, the process and mechanism is fast and effective. But the processes to share information are slow, bureaucratic and inefficient when information sharing takes place between a developed and developing country.

At the same time, as Suraj Jaiswal of the CBGA pointed out to this author, while highlighting the shortcomings of the Indian government’s tax authorities, one should not lose sight of the larger geopolitical scenario in which the governments of developed countries are subtly and not so subtly opposing moves for ensuring greater transparency and the automatic and free exchange of information on financial transactions and flows of funds to their countries. As already stated, the US tax authorities want and quickly obtain information from Switzerland but FATCA has limited reciprocity resulting in other countries not getting commensurate information from the US.

On the whole, it can be confidently asserted that it is far from clear whether the new law against Indians illegally holding funds and assets abroad or the proposed new law on benami transactions will be effective. There is much at stake in continuing with a system which is non-transparent. It will take some years before information on international financial flows, including illicit transactions, becomes more easily accessible to India’s law enforcement authorities. It will take even longer for the country’s officials to become proactive, more efficient, effective and, importantly, honest about going after those who surreptitiously take money out of India. We in India may be proficient while making laws, but we are lax in enforcing them.

This story is likely to be played out once again.

Excerpted with permission from Thin Dividing Line, Paranjoy Guha Thakurta with Shinzani Jain, Penguin Random House India.