Observers maintained that it was an amnesty since a person could pay 30 percent tax and 30 percent penalty, or a total of 60 percent tax, on undeclared foreign income and assets, and go scot free. A government circular clarified the defaulter would get “immunity from prosecution under the five Acts, viz the Income Tax Act, Wealth Tax Act, FEMA (Foreign Exchange Management Act), Companies Act and the Customs Act.” But it wouldn’t prevent action under any other Acts such as the money laundering, Indian Penal Code or wildlife protection ones.
Both the measures are unlikely to help and may increase the quantum of black money. Experts have proof that regular amnesties only encourage the creation of illegal wealth because the criminals feel that they will get another chance in the future to legalise the money. In March 2015, the Minister of State for finance, Jayant Sinha, told Parliament that the government-appointed Tax Administration Reforms Committee (TARC) had opposed amnesty schemes.
“The reason for this is that taxpayers keep waiting for such schemes to be announced and take advantage of these schemes to build their capital. Amnesties also cause inequity among taxpayers, and there is no proof that they improve taxpayer behaviour among evaders,” said Sinha explaining TARC’s logic in his written reply to a Lok Sabha question. In a recent article, SS Khan, former member, Central Board of Direct Taxes, wrote that amnesty schemes work only if the offenders “perceive a greater present chance of being detected.” This is obviously not the case here because the government has willy-nilly accepted that it has little or no information on black money.
Since Independence, this is the 13th amnesty scheme, although it is called a ‘compliance window’. The reason: finance ministry officials contend that all the past amnesty schemes asked the evaders to pay the tax as per the existing rate, but didn’t impose any penalty on them. This was true of the last amnesty, announced by Chidambaram in 1997, which attracted 475,477 declarations, disclosed income of Rs 33,697 crore, and tax payment of Rs 9,729 crore. However, Jaitley has asked the offenders to pay 30 percent tax on their undisclosed income, along with 30 percent penalty
Draconian laws of any nature to curb any offence don’t necessarily work in practice. This is especially true in the case of income tax. Experts contend that systemic changes that deter people and corporate entities from generating black money are required. These can be either policies that encourage people to declare their income, ie lower and simplified taxes, or those that curb the needs to possess black money, ie in the real estate, narcotics or gun-running trades.
Khan argued in his piece, the new legislation is almost the same as the existing income tax rules. He wrote that the Income Tax Act “requires Indian tax residents to disclose their global incomes… and pay due tax on it”. The penalty rate in the existing laws is 300 percent and the evaders can be punished with “rigorous imprisonment of up to seven years.” The new Act has similar provisions, except for jail up to 10 years, but only for ‘wilful’ defaulters. Khan added that the income tax rules were included in 1975, but there was no case of an evader sentenced to seven years.
HARSH, YET FARCICAL, ORDERS
In recent times, the stock market regulator, SEBI, and Supreme Court gave scalding judgements in two cases — Sahara Group and Pearls Group. In both cases, they forced the promoters to return huge sums they had collected from their investors. The amount in Sahara’s case was Rs 33,000 crore, along with interest as on 4 March 2014, and Rs 50,000 crore in Pearls’ instance. While the Supreme Court put Sahara’s Roy and others behind bars, SEBI imposed the largest fine of over Rs 7,000 crore on Pearls Group. Both these were hailed as landmark judgements to protect the small investors.
However, these orders may have missed the woods for the trees. The reason: both SEBI and the Supreme Court have observed that the millions of investors that the two business groups claimed to have may not be real. In its August 2012 order, the apex court expressed that “there may be no real subscribers for the Optionally Fully Convertible Debentures issued (OFCDs) by the two Sahara companies. Or alternatively, there may be an intermix of real and fictitious subscribers”.
Based on the letters written by one of the Sahara firms in January 2011, SEBI felt that there was something glaringly wrong. The apex court order said that after SEBI’s insistence to reveal the investors’ identities, “the company was seeking professional services to collect and compile data pertaining to the OFCDs issued by it. Since the subscription of the OFCDs under reference commenced in March, 2008, the same raised suspicions about the genuineness and the bonafides of the appellant companies (the two Sahara entities). This itself is sufficient to conclude, that the whole affair was doubtful, dubious and questionable. The consequence thereof, if correct, would be shocking.”
Any intelligent person can draw a reasonable and logical conclusion from the above observations and analyses. As was alleged several times, both Sahara and Pearls may have funnelled black money, including amounts owned by powerful individuals, to convert it into white. This could be the only, or main, reason, why the list of their investors includes benami, or non-existent, names. If this was indeed the case, the various judgements may benefit the black economy over the next few years.
Since SEBI and the Supreme Court have insisted that the money be returned to the investors, it has not targeted the companies either under money laundering — conversion of black money into white — or under other provisions related to the black economy.
In addition, the regulator and judiciary have refused to go after the people, whose money it really was. Therefore, the tax evaders and black marketers, who gave their money to Sahara and Pearls are sitting pretty. They have no fear of punishment. What’s better, they may get their money back, along with interest! They only have to somehow get someone to impersonate the benami names.
These are the problems associated with the black economy. Good intentions, excellent laws, insightful observations and an aggressive public stance are not enough to curb it. What is required is to take the actions to their logical ends. Good intentions need to be backed up with intelligent moves, laws need to be refurbished with quick actions, insights have to be converted into relevant cases and rhetoric has to be bundled with an understanding of how the ‘black’ system works.
What’s more relevant is that as long as the offenders realise that they have the options to convert their black money into white through legal and untraceable mechanisms, they will not be deterred. As long as the evaders know that they can wriggle out of tricky situations because of corruption in the society, they will not be bothered. As long as the stick isn’t strong enough, which scares a sizeable section, it will be broken, again and again. It will remain an ongoing stalemate. Black will remain black.
editor@tehelka.com
