Over the last five years, most governments were complaining about the tax evasion and black income held in tax havens. As a result, many international arrangements are in construction mode to overcome the problem of tax evasion and avoidance. Notable ones are the G20’s BEPS (Base Erosion and Profit Shifting), the new international standard on Automatic Exchange of Information (AEOI) and International standard of Exchange of Information on request (EOIR).
In the same manner, many tax havens are under severe pressure to make their financial system combatable with new global transparency norms. They have to disclose tax and bank account information to other countries. The Global Forum for Transparency has noted that there is progress of compliance by these tax havens in its December 2014 Report.
Hence, it is known that in future, there will be greater disclosure, greater information exchange and greater compliance from governments and financial institutions regarding cross national economic activities. Given this welcome trend, it will be risky to park black money in other countries, especially in tax havens.
In this context, governments are setting preparatory measures to facilitate the new transparency environment. Most of them are now making two sets of measures; first giving amnesty to the existing black income holders. Second there are strong legislations incorporating criminal punishments to the people having undisclosed income in foreign countries.
Already governments in US, Germany, Denmark, Australia, and UK etc have announced amnesty schemes providing a chance for their citizens who have illegal income in foreign countries.
The amnesty schemes are smartly designed by all including the US with low tax rate on black income backed by either simple or nil penalties or fines.
The objective of this tactics is to ensure that all the black income is returning to the homeland. A situation of non-reporting may led to loss of income to the foreign destinations forever. This is because in future with criminal provisions, income holders may abandon the income fearing punishment.
Following the global trend, India has introduced the Undisclosed Foreign Income and Assets (Imposition of Tax Bill 2015) in the Parliament with strong provisions against undisclosed income holders.
The Bill has several notable features including criminal punishment and severe fines to the holders of undisclosed income in foreign countries.
But the decisive provision about the amnesty clause seems to be slightly hard to incentivize the black income holders to take back money from foreign lands.
As per the bill, a black income holder has to pay a tax rate of 30 % plus a penalty of 90 percent of the tax. Altogether this means the disclosing person will get 43% while the government will get 57%.
On the other hand, in the US, there is the normal tax rate with interest rate for late payment. There is no prosecution on income holders. Australia has perhaps the most soft amnesty scheme as income holders have just to pay the normal tax rate. In Denmark and in Italy, there is only the normal tax rate and reduced penalties. In all these countries there is no prosecution of income disclosing persons as in the case of India.
The most severe amnesty scheme is that of Germany where there is investigation and prosecutions on income disclosing persons besides tax and penalties.
For India, the problem of black income held in other countries is quite unique. Firstly, it is one of the largest affected countries. Secondly, most of the income held in overseas is out of illegal activities like corruption, smuggling etc. On the other hand, in the US, it is the salaried class who are reported to be the largest group.
Here, accommodating them without giving a punishment is understandably against social ethics. At the same time, if harsh punishment in the form of high taxes is imposed, the income holders may altogether abandon it or take other risky options which is not good for the interest of the country.
India is in a dilemma on this matter and the amnesty provision (whether the Finance Minister agrees or not agrees- it is an amnesty provision in content) has the risk of higher rate compared to the international standard and a slight reduction may incentivize people to bring back black money.
The present global wave of amnesty scheme is a one time affair before the launch of a global tax inflormation framework and anti-evasion arrangements.
Priority should be to bring back as much black income as possible becasue they represent the loss of wealth for the coutnry. An optimising strategy by reducign penalty to say 50% of the tax may increase disclosures and thus return of money to the country. Here, the governement can follow a pragmatic approach rather than following an idealistic one or sentimental one.