In the past few years, the issues of black money and illicit financial flows pouring into tax havens have occupied perhaps as much global political space as the issue of world economic crisis itself. As regards India, ever since the German and the French revenue authorities ‘gifted’ the Central Board of Direct Taxes (CBDT) the stolen data of Indian tax dodgers safe-keeping their illicit funds in some of the tax havens in Europe, it assumed serious proportions of a mega political issue during the general elections.

What added fuel to the fire was the US-based NGO Global Financial Integrity’s (GFI) studies indicating that there was a positive correlation between India’s growth story and the soaring graph of illicit financial flows between 2002 to 2011. And even as the developing countries in totality lost to the tune of $6 trillion, Asia lost about 40 per cent of it and India's share was a whopping $344 bn.

In this backdrop, some public-spirited citizens led by the noted lawyer Ram Jethmalani, filed a Public Interest Litigation before the Supreme Court and charged that the then UPA-II government was not taking substantive steps to recover the lost wealth of India. While hearing the case, the Apex Court gave certain directions on which the UPA-II did not show any alacrity to act and thus handed over explosive ammunition to its principal rival BJP during the polls. The Narendra Modi-led BJP made the issue of black money stashed in tax havens as one of its key political planks.

And immediately after being sworn-in as PM, Modi in his first cabinet meeting announced the constitution of the Special Investigation Team (SIT) on Black Money headed by the two former judges of the Apex Court. With the din over the names of the account holders in the Geneva-based HSBC Bank kept on rising in decibel, the Modi government came under tremendous pressure to roll out more measures. And, on advice of the SIT, Finance Minister Arun Jaitley announced his two-pronged approach of a domestic legislation and an independent Black Money Bill (Undisclosed Financial Income & Assets Bill) in his Budget speech.

The Black Money Bill was soon tabled as a Money Bill and the same now stands enacted with minor amendments. Although this new Act may mirror lots of similarities to the Income Tax Act in terms of its assessment, appellate and other procedures, the two key distinguishing features are – 1) offences relating to unreported foreign income or assets are to be treated as a predicate offence under the Prevention of Money Laundering Act (PMLA); and 2) the period of imprisonment being enhanced from seven years in the present Income Tax Act to 10 years in the new Act.

Now, the major question which the CBDT needs to quickly answer is that whether there is going to be any parallel proceedings under the PMLA as soon as an offence is determined as a predicate offence or even within the IT Department. It is going to be a big challenge to coordinate assessment efforts under the normal Act and when a particular case may qualify to be referred to a separate set of Assessing Officers under the new Act. A clear-cut administrative instruction is required to be issued to sort out such internal but vital piece of procedure to roll out the new provisions of the Act.

The fact is neither the new Act nor the IT Act clearly defines – what is an asset? It may be inferred that an asset includes both movable as well as immovable property. Even an interest in the property is going to be treated as an asset. And whether such an asset is either in the name of an assessee or he is merely a beneficial owner or a trustee or a beneficiary of a trust floated outside India, all will be covered under the provisions of the new Act.

Settlement Commission

The tax in the highest rate bracket of 30 per cent is going to be levied on the market value of the asset – the year of acquisition of such an asset is simply going to be treated as immaterial. As per the provisions, no deduction of expenditure or exemption is going to be allowed for any set off. Even foreign tax credit has been disallowed under this Act. The new Act has also closed the door of the Settlement Commission apart from no provision for compounding of offence.

Before the new provisions come into effect, the CBDT is soon going to notify a ‘Compliance Window’ for potential declarants who are expected to come out clean by making honest declaration of their overseas income and assets. Such a window is likely to be provided for a period of six months to make the declaration and pay the taxes with 300 per cent penalty. If one tends to err in one's computation of taxes, there is not going to be any refund of excess tax paid.

Once the ‘Compliance Window’ period is over, as per the finance minister, the harsh provisions of this new Act will take its own course. And if one is caught contravening the provisions of the new Act, there is going to be huge penalty besides prosecution which would be conducted in expeditious manner.

To what extent such an amnesty scheme would work in favour of the exchequer would, if we go by the global trend, depends on the authenticity and completeness of tax information either gathered by the CBDT on its own or received from any other tax jurisdictions under the provisions of the Double Taxation Avoidance Agreements (DTAAs). One hopes Jaitley succeeds in garnering substantial revenue from this scheme which would alone satisfy the expectations of our judiciary as well as the civil society.

(The writer is Founder Editor, Taxindiaonline.com)