Laws that regulate black money in India

With the government talking about a crackdown on unaccounted (‘black’) money, it is worthwhile to take a look at the laws meant to check its growth.

Interestingly, Indian tax laws do not have any clear definition of the term ‘black money’.

Generally, money can be referred to as black money in two scenarios.

One is where it has been earned by illegal activities like the drug trade, terrorism, corruption, etc.

The second is where wealth has been created out of money on which taxes have not been paid.

“The term is not easy to define as it might have the characteristics of a chameleon, changing its colour to suit the purpose.

It includes 'unaccounted income', 'black income', 'dirty money', 'black wealth', 'underground wealth', 'black economy', 'parallel economy', 'shadow economy', and 'underground' or 'unofficial' economy”,” says Vidya Rajarao, partner, forensic services, Grant Thornton India LLP.

Corporate law experts say tax authorities are increasingly likely to verify whether foreign currency accounts held by resident and non-resident Indians comply with the foreign exchange regulations, and were disclosed properly in annual tax returns.

According to Deep Roy, associate partner, Economic Laws Practice, no person resident in India is allowed to open any foreign currency account without approval of the Reserve Bank of India.

However a person who is resident in India is permitted to open a bank account in a foreign bank if he or she has to engage in any current or capital account transaction, and must remit the money from India as prescribed under the Foreign Exchange Management Act (Fema) of 1999.

There is a specific money-laundering law -- the Prevention of Money Laundering Act, 2002.

This provides for punishment in the case of money laundering and for hoarding of black money.

Corporate lawyers say if any foreign account holder violates Indian laws regulating the flow of foreign currency, tax authorities can enforce repatriation of such funds, including funds required to recover the unpaid taxes, in addition to the penalty under Fema.

In addition, specific provisions under the Income Tax Act, 1961; Prevention of Corruption Act, 1988; and the Narcotic Drugs and Psychotropic Substances Act of 1985, could also be applied if the case so demands.

Further, a non-resident Indian is liable to be proceeded against under Fema if there has been any concealment of income.

Any non-payment or under-payment of tax is subject to interest and penalty.

The latter could go up to three times the amount of tax evaded.

The civil and criminal liabilities for holding black money range from rigorous imprisonment for not less than three years and up to seven to 10 years, along with a fine.

By the Income Tax Act, any Indian citizen who holds money abroad on which tax was owed but not paid becomes liable to pay tax, interest and penalty.

“The penalty could be as high as 300 per cent of the tax that was avoided.

"The interest would be 15 per cent per annum since the time the tax authorities believe the tax was evaded,” says Rajarao.

If booked under NDPS, the maximum imprisonment could extend up to 20 years; the death penalty is also attracted.

India’s efforts to bring back black money stacked abroad in foreign currency accounts are hampered by bilateral Double taxation Avoidance Agreements signed with various countries.

Corporate tax experts say the confidentiality provisions of these DTAAs generally allow disclosure or use of information only for tax purposes.

Most countries have generally refused to accept India's request to completely eliminate the confidentiality provisions.

A majority of countries feel the information should not be made public until a tax case comes up before a court of law.

Corporate tax lawyers feel there is bound to be a step-up in scrutiny by tax authorities of any money held by Indians and NRIs in foreign bank accounts.

According to Milind S Kothari, managing partner & head -- direct tax, BDO India LLP, the new tax return form requires information to be provided in relation to various assets held by an individual outside India, including bank accounts in which one is a signatory.

However, there are no such provisions applicable to NRIs.

However, NRIs are required to report income that is sourced, and therefore liable to be taxed, in India.

When such an NRI becomes a resident in India, he or she needs to ensure that global income is offered to tax in India (subject to some exceptions), and also disclose information in relation to assets held outside India, adds Kothari.

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