Give the government its due

Several steps have been taken to detect undeclared assets, tax evasion

It has become fashionable in certain circles to criticise the Finance Ministry and the government in general for the perceived failure of the demonetisation exercise to curb black money and tax evasion.

Black money is not kept in cash, but is predominantly stored in accounts abroad, or is invested as gold or real estate, the naysayers proclaim. So, apparently, not only has the government done next to nothing to bring the current stock of black money to light, but it hasn’t even done anything to stem the future generation of it.

Creditable moves

This is simply not true. When appraising such efforts, it’s best to be critical and fair, and so credit should go where it is due. There are several steps the Finance Ministry, through the Central Board of Direct Taxes, has taken on an international level to not only detect undeclared assets held by Indians abroad, but also ensure that tax evasion by large companies is vastly curtailed.

The recent Cabinet decision approving India’s signing of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting is exactly that. Companies in India, and all over the world for that matter, use loopholes in tax laws to create shell companies in jurisdictions that levy zero or negligible tax, and report their profits as having come from there.

In doing so, they get away with paying a fraction of the tax they normally would, and next to nothing goes to the government of the country where they are actually making their profits.

Now, this isn’t exactly the generation of black money, since it is technically legal, but it certainly counts as grey money. And it is this profit shifting that the international convention seeks to prevent. The draft text of the Convention was finalised by about 100 countries and an even larger number are expected to be the final signatories.

In addition, the Indian tax authorities have entered into several multilateral and bilateral agreements enforcing the easy and timely exchange of information on the assets held by Indians abroad.

India joined the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information in June 2015, with 94 countries having committed to the exchange of financial information on an annual and automatic basis. This basically means that India no longer needs to keep asking these countries for information on assets held by Indians; it will all be automatically shared every year.

India and Switzerland late last year signed a joint declaration for the implementation of the automatic exchange of information between the two countries. Under the agreement, from September 2019, the Swiss government will share the financial information of accounts held by Indian residents in Switzerland for 2018 and subsequent years, on an automatic basis. India has signed several such agreements with various countries. And that’s not all. India is also a signatory to the US-backed Foreign Account Tax Compliance Act (FATCA), which is another legislation that seeks to end tax evasion by companies. Significantly, FATCA is backed by the US, which has already got 110 countries to sign it, and is heavily leaning on others to also do so. All of this is not to mention India’s own legislation, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which is aimed specifically at tackling the issue of black money stashed abroad.

The law has provisions for strict penalties and prosecution if black money is found to be stored abroad, and also, for the first time, has made the “wilful attempt to evade tax” a punishable offence under the Prevention of Money-laundering Act, 2002 (PMLA). This involves attaching and confiscating the amount on which tax has been deemed to have been evaded.

Not been idle

Naturally, most of these steps have not received the kind of media and public attention that demonetisation has. But that has also meant that the allegations of government inaction are uninformed and incomplete. There is much more the Finance Ministry can do to curb the creation of black money, but it has certainly not been idle.

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