Modi government has failed us on black money. New bill won't help

The pledge to bring back stashed away funds may come back to haunt the government, unless it admits the mistake promise forthwith. Instead, the government must deliver on other realistic promises on price rise, employment generation etc. Time is running out.

But the mirage chasing continues! Now, the government has triggered an ill conceived legislation: “Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015”, introduced in Lok Sabha on March 20, 2015. Mark the words “foreign income” and “imposition of tax”. Foreign income means dollars or any other convertible currency, not the rupee. No one can earn in rupees in a foreign country. The rupee cannot even cross the national barrier in terms of extant exchange control regulations.

Flawed

So, when the government “imposes tax” on the dollar, the tax must be paid in dollars alone. There is no such requirement in the bill. Permitting payment (of tax, penalty etc) in rupees would induce the generation of additional black money in India! And India will be denied the foreign exchange. Thus, the bill is flawed fundamentally!

Flaw apart, the bill is also draconian and retrograde. It proposes to tax undisclosed foreign asset/income at 30 per cent, levy penalty at 90 per cent, jail term upto ten years and slap fines from Rs 25 lakhs to one crore rupees!

Do we really need such a draconian law? Are extant laws not adequate? If not, should we not simply amend/fine-tune the law, rather than enacting another set of law for international black money? The fact of the matter is that we have too many laws but very little sense of justice on the part of those administering the law.

Just consider this: FERA was operational from 1947 to 2000. On June 1, 2000 FERA was replaced with FEMA, 1999. Later, on July 1, 2005 the Prevention of Money Laundering Act, 2002 (PMLA) was notified.

The powerful FERA reigned supreme for 53 years till 2000. FERA’s ferocity and reach was enough to solve the problem of stashed away funds. But successive governments, instead of using FERA, misused and abused it. That is why Parliament was forced to replace FERA with a softer FEMA from June 1, 2000.

Today FEMA allows a resident to hold foreign assets freely, provided these were acquired when he/she was a person resident out of India. FEMA also enables a person to claim a non-resident status while remaining physically in India for 365 days in some situations. FEMA now permits residents to transfer abroad $250,000 per person per year. Full marks to Reserve Bank of India for liberalising these exchange control regulations.

Assets

And the anti-money laundering legislation (PMLA), on the other hand, fails to exercise jurisdiction over either black money or foreign asset. PMLA can slap money laundering charge for inducing prostitution, but cannot slap a similar charge against a tax evader holding assets abroad. The law is as ridiculous as that!

Perhaps that is why the present bill has been introduced. But it is unlikely to achieve any meaningful purpose. In one stroke it will scare away every person holding foreign asset/income, legitimate or not. Non-residents and foreign nationals will shy away from visiting India for an uncertain period lest they became residents and get caught in the web of law. The bill will scare away every person opening foreign account abroad, even legitimately. International trade and international banking would be jolted. The bill may even dampen India’s investment climate.

Instead of proposing such an ill conceived bill, the government could have simply expanded the scope of PMLA by including foreign exchange (forex) violation and tax evasion both within its ambit. Including tax evasion alone is not enough. The critical component is forex violation. Stashed away funds and forex violation are intertwined.

On the one hand, the RBI is justifiably going on liberalising exchange control regulations, and on the other, government is unleashing reverse swing, just because unrealistic promises were made during election campaign. The situation is bizarre!

The new bill stipulates that undisclosed income abroad will no longer be taxed under the Income Tax Act. Therefore, domestic black money holders can escape from the Income Tax Act, 1961 by stashing away funds abroad. Conversely, foreign black money holders can escape from the rigours of the new law, simply by converting foreign black money into Indian black money. This is curious!

Punishment

Thus, the bill creates arbitrage opportunities with a lesser punishment if black assets are transferred from off-shore to onshore! This can hardly be the intention of any legislation. And finally, where is the power to bring back stashed away funds in the bill? It is missing! It evidently appears that the government is being ill advised.