“Black Money” – The legislative perspective in India

"Follow the money" was the short and simple advice given by the secret informant, within the American Government, to Bob Woodward, the journalist from Washington Post, in aid of his investigations of the Watergate Hotel break in. And this is how the order passed by the Supreme Court of India begins in the Writ Petition filed by Mr.Ram Jethmalani on the issue of black money. Etymologically, the term “black money” relates back to the use of term “dirty market” or “black market”. The term “black market” was popularly used in the English Channel and France during the reign of Queen Elizabeth I (1533-1603), when stolen graphite used for moulds in making cannon balls and first pencils, was traded in illegal or ‘black’ markets. In 1800s ‘black’ or ‘dirty’ markets were established after a ban on public auctions of slaves in Britain. Officially, in 1931 around the First World War, “black market” referred to the sale of goods that were said to have been lost in a fire, but had actually been salvaged or stolen. Such term was also referred to for trade of rationed goods and stolen military supplies (clothing, blankets, food etc). The money circulated in such “black markets” came to be popularly known as “black money.”The phrases “black money” or “black income” can be classified into two categories: domestic and foreign. Foreign black money is the money which is laundered overseas (in foreign banks) by concealing the origins of such money. According to the Ministry of Finance, the Swiss National Bank held funds of approximately INR 92.95 billion deposited by Indian citizens in 2012. Through this article, two anti money laundering legislations, namely the Prevention of Money Laundering Act, 2002 (“PMLA”) and The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“BMA”) will be briefly discussed. This article also attempts to discuss the repercussions of the circulation of black money in a society and the challenges faced in the implementation of the said legislations.LEGISLATIONS:i.Prevention of Money Laundering Act, 2002The PMLA was introduced in 2002. The PMLA was a welcome change to the world of curbing and controlling the issue of money laundering. But by the time the PMLA and the rules thereunder came into force, it was 2005. The most recent amendment was in 2012, which came into force in 2013. The amendments made to the existing PMLA were done in order to comply with the Financial Action Task Force, an international inter-governmental body established for its joint agenda of combating money laundering activities, of which India is a member. The PMLA mandates the banking companies, financial institutions and other intermediaries to maintain a record of all transactions of over INR 10 lakhs, all suspicious transactions, all cross border wire transfers of greater than INR 5 lakhs and all transactions of purchase/ sale of immovable properties of the value greater than INR 50 lakhs. The penalties attracted to offences under the PMLA are rigorous imprisonment of 3 to 7 years and/or a fine. The PMLA also deals with the confiscation of both movable and immovable property and also gives the Adjudicating Authority (the investigating authority under the PMLA) the powers similar to those vested in a civil court.The Schedule A to the PMLA contains an extensive list of what amounts to “scheduled offences”. Some of the offences in various legislations that are covered under the Schedule A of the PMLA include certain provisions of the Indian Penal Code, the Prevention of Corruption Act, the Customs Act, the SEBI Act, the Copyright Act, the Arms Act etc. ii. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015For long political parties have been talking about the ill effects of black money, especially that which was stashed in foreign jurisdictions. Keeping in mind the demand of the electorate, which brought Mr. Narendra Modi and his party to power, the BMA was enacted on 26th May, 2015 and the same became effective from 1st July, 2015. Notably, the BMA does not repeal the PMLA and in fact, is a welcome addition to the earlier legislation.The BMA deals only with the black money stashed overseas. The BMA initially provided for a compliance window which allowed persons possessing undisclosed assets/money overseas to declare and regularize the same. The incentive that was provided to persons making such disclosure was that such persons were required to pay an aggregate of 60% tax (30% towards tax & 30% towards penalty) on such undisclosed assets in addition to avoiding any prosecution for such disclosure. After expiry of such compliance window, penal provisions under the BMA provide for rigorous imprisonment upto 10 years and payment of 120% tax (including penalty) for hiding undisclosed assets/money overseas. EFFECTS OF BLACK MONEY:The storage, utilization and circulation of black money within the country as well as its laundering overseas deeply impacts the revenues of the country in the form of direct and indirect tax recovered from such income. This makes it difficult for the Government to form fiscal policies and undertake public reforms since there is no account of the money which has gone unaccounted without recovery of taxes. Possibly, such illegal money stashed overseas will be re-circulated in the country and used for illegal activities, including terrorism, human trafficking, drug peddling etc. CHALLENGES FACED IN IMPLEMENTATION OF ANTI – MONEY LAUNDERING LEGISLATIONS: The two legislations dealing with anti-money laundering operate hand in hand towards combating possession of black money and money laundering. On paper, the two legislations appear to be effective but what is most crucial with regard to such legislations is the effectiveness of their implementation in India. Upon implementation of the BMA, about INR 4000 crore was disclosed within the compliance window under the BMA, thus bringing in about INR 2500 crore as tax/penalty on such undisclosed assets. However, such disclosed black money is only a miniscule amount compared to the total amount of black money deposited in foreign banks. There are few reasons why effective implementation is a major challenge despite laudable purpose of the two legislations:(i) Black money is laundered to countries with very low tax rates (commonly called tax havens). Additionally, Double Taxation Avoidance Agreements have been executed between India and few of such tax havens like Mauritius. Black money laundered in these tax havens can again be brought back to India in the form of investments thus avoiding payment of taxes in India;(ii) Strong privacy laws in certain countries protect the account holders from disclosing the source of the unaccounted money deposited in bank accounts. The benefit of the doubt that is given to such account holders acts as a major impediment in the detection of black money;(iii) The complex nature of the judiciary and political structure coupled with corruption in the country tests the effective implementation of such legislations.THE WAY FORWARD:The Ram Jethmalani’s case (supra) provided for constitution of High-Level Committee (HLC) as a Special Investigation Team to investigate on matters dealing with unaccounted money secretly stored by Indian citizens overseas. Only time will exhibit the effectiveness and success of the HLC as well as the conjoint implementation of PMLA and BMA.DISCLAIMER: This article has been authored by Amit Vyas, who is an Associate Partner and Varun Mamniya, who is a Senior Associate and Lizum Wangdi, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.