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Businesses need to spruce up their compliance regimen in line with the government’s move to curb generation of illegal money -- in India and abroad
Over the past week, many corporate lawyers and tax experts have been poring over the draft of the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015, popularly referred to as the anti-black money Bill, which was passed by Parliament.
Also under the lens were the different provisions of the Benami Transactions (Prohibition) Bill 2015, and their implications on companies.
While this Bill, introduced in the Lok Sabha, is aimed at curbing generation of black money in the country, the anti-black money Bill targets undisclosed wealth stashed in tax havens abroad by resident Indians.
The proposed laws are applicable to individuals, partnership firms, un-incorporated entities and companies.
They will also be applicable to transactions that are not properly disclosed, or not disclosed at all.
The proposed laws have huge implications on the way business is conducted.
This comes with attendant legal consequences in case of violations for key managerial personnel of a company.
These include imprisonment up to seven years in the case of Benami Transaction (Prohibition) Bill, and up to 10 years for the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill.
Fines go up to 25 per cent of the fair value of any benami property.
Penalties for undisclosed foreign income and assets extend up to 300 per cent of the taxable amount.
Tax experts say one of the challenges faced by the government and enforcement agencies in their fight against black money is the use of ‘shell companies’ in India and abroad to convert illegally-held money.
“These are more often than not, used to obscure the ultimate beneficial owner, route ill-gotten wealth or commit fraud,” says K V Karthik, senior director, Deloitte in India.
The new laws will help detect cases in which ‘shell companies’ are being used to layer or mask the origination of ill-gotten wealth.
This will also assist banks in case funds are siphoned off by the borrowers, and assets created in benami names, say forensic specialists.
The definition of a benami transaction includes both movable and immovable properties. So, apart from physical properties, gold and company stocks will also come under the purview of benami transactions.
Vikram Babbar, director, fraud investigation & dispute services, EY, points out that banks are mandating forensic audits on corporate borrowers who are categorised under non-performing assets.
“This is to ascertain the genuineness of the situation and identify any case of fund diversion or siphoning by borrowers,” says Babbar.
Armed with stronger laws, if diverted funds are invested in benami transactions, it would lead to prosecution of the borrower group, says a tax expert.
Both these Bills, apart from confiscation, also provide for prosecution, acting as a major avenue to block the generation and holding of black money in the form of benami property or shell companies.
It is important to assess whether their transactions are in line with the provisions of the anti-black money law.
“It is not only required to get the risks assessed but also how it impacts the business,” says Nidhi Goyal, managing director (tax and regulatory affairs), Protiviti India, a risk and business consultancy firm.
Following the review and risk assessment, corrective actions and compliance-check should be done by corporates to maintain stability in their businesses.
“This process has to be extended to any special purpose vehicle or group companies,” adds Goyal.
Dinesh Anand, leader (forensics services) at PwC India, says businesses will have to perform a number of steps to effectively address and mitigate risks that are associated with these proposed pieces of legislation.
This includes understanding and examining in detail the compliance obligations associated with each of these laws individually.
Prepare and undertake comprehensive risk management exercises to ensure all areas of operation impacted by these proposed legislation not only follow robust business practices, but are also equipped to comply with reporting obligations.
“Businesses must ensure that employees and third-parties are adequately trained on compliance related issues, while putting in place a monitoring system to red flag any potential problematic transactions,” says Anand.
For those companies that might potentially fall foul of the provisions of the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, Rakesh Nangia, managing partner, Nangia & Co, advises these should simply come clean and avail of the one-time window offered by the government to pay penalty and tax on any such disclosed foreign income or asset.
EY’s Babbar, however, feels the effectiveness of the new laws will depend on putting in place a fast-track mechanism for such cases.
“The punishment should be time-bound, and not left to the weaknesses in the judicial system delaying the whole process,” says Babbar.
It is important for companies to be wary of undisclosed foreign incomes and assets, as well as and benami transactions.
WHERE THE SHOE PINCHES
BENAMI TRANSACTION (PROHIBITION) BILL, 2015
INVESTIGATING AUTHORITIES HAVE POWER TO
PENALTY FOR ENTERING INTO A BENAMI TRANSACTION
PENALTY FOR FURNISHING FALSE INFORMATION
OFFENCES BY COMPANIES
THE UNDISCLOSED FOREIGN INCOME AND ASSETS (IMPOSITION OF TAX) BILL, 2015
PAY INTEREST
PENALTY
Up to 300% of the tax on undisclosed foreign income and assets
Effective total tax and penalty could equal 120% of the foreign undisclosed asset and income
PROSECUTION
LIABILITY & PROSECUTION IN CASE OF COMPANIES
LLP
