What are the recent government steps against black money?

Over the last few years, government has intensified its fight against black money. Several big and small measures were launched and cumulating together, all these form a coordinated strike against black money. It is well recognized that black money generated in the country are stored mostly in India though a part of those is held in overseas as well. Hence, efforts on both fronts -domestic and foreign stored black money were made by the government.

A. Black Money stored in foreign countries and government measures against them

Government has made several measures to fight black money parked in other countries. These include:

  • Undisclosed Foreign Income and Assets Act 2015
  • Signing of Automatic Exchange of Information and tax information exchange agreements agreements with countries like Switzerland.
  • Modifying Double Taxation Avoidance Agreements with countries like Mauritius
  • Putting more regulation on Participatory Notes

(1) The Undisclosed Foreign Income and Assets Act 2015 imposed penalty and tax on foreign income and asset holders by providing a disclosure window. The scheme had only limited achievement with just Rs 4200 crore black money revelation.

(2) Automatic exchange of information involves the systematic and periodic transmission of “bulk” taxpayer information by the source country to the residence country concerning various categories of income (e.g. dividends, interest, etc.). the AEOI was signed under the G20 framework and India is a signatory.

 Role of Participatory Notes and FDI Round tripping: Measures taken by the government

Black money of Indians kept in foreign countries is a higher order problem. First is that it shows the ability of the affluent class to drain out money and successfully deploy in overseas without getting the notice of the tax authorities. Secondly, a more important outcome is that they are able to bring back this black income into India through two important channels- Participatory Notes and Round Tripping FDI.  

Government has made two sets of initiatives on these two ( 1) Modifying Double Taxation Avoidance Agreements and (2) More regulations on Participatory Notes.

Large scale investment from tax haven countries or those have DTAAs with India shows black money is making its return to India. Bulk of the FDI is coming through Mauritius. Similarly, considerable portion of FPI is coming through Singapore.

(3) Measures against participatory notes

SEBI on July 8, 2017, has banned FPIs from the issue of Participatory Notes for investing in equity derivatives. The PFIs can issue PNs for hedging the equity shares held by them. The main purpose of PNs were to invest in Indian equity derivatives. Hence, the removal of PNs for subscribing equity derivatives will make the PN route almost useless. Previously, the PNs were the major instrument for least disclosed foreign investors to make investment in the Indian stock market. 

SEBI has proposed an increase in disclosure requirements and restricted transfer of participatory notes to curb money laundering. According to SEBI, the transfer of P-Notes will be restricted and allowed only after prior consent of the issuer. This means that for every downstream transfer of a P-Note, prior consent of the issuer would be needed.

(4) Restructuring of India-Mauritius DTAA to check round tripping

Government has restructured India-Mauritius DTAA by taking right to impose capital gains tax in India (source country). in this way, other DTAAs with countries like Singapore, Cyprus etc., also will be modified.

(5) Foreign Exchange Data transfer to investigation agencies: The Special Investigation Team on black money proposed the RBI to transfer foreign exchange transactions data to Enforcement Directorate and Directorate of Revenue Intelligence. Additionally, FET–ERS data should capture the PAN number of the importer or the exporter.

Foreign Exchange Transactions Electronic Reporting System (FET-ERS) – IDPMS (Import Data Processing and Monitoring System) and EDPMS (Export Data Processing and Monitoring System) are databases about foreign currency dealings. Under FET-ERS, all authorized dealers are obligated to report each foreign exchange transactions (inward and outward remittances in FET–ERS) to the RBI. 

B. Fight against domestic black money

It is estimated that nearly 95% of the black income generated in India are stored within the country. physical assets, real estate, illegal activities etc., are some of the areas where black money and parallel economy concentrates. The major initiatives against black money within India are:

(1) Income Disclosure Scheme 2016

The scheme launched on 1st June 2016 with the starting of a three-month declaration window. People and entities can reveal black money earned till 2016 and convert them into white money by paying 45% payment including tax plus surcharge and a penalty.  

(2) PAN has been Mandatory for high value transactions

Permanent account number (PAN) is now quoted compulsorily for all transactions above Rs.2 lakh from January 2016 and will be applicable on all sale and purchase of goods and services and for all modes of payment.

PAN is already a must for almost all financial sector transactions, car purchases and to buy immovable property above a certain limit. Similarly, PAN is mandatory for the purchase of cash or prepaid cards amounting to Rs. 50,000 or more in year.

The monetary limit for quoting PAN for sale or purchase of immovable property has been raised to Rs.10 lakh from Rs.5 lakh.

PAN will also be mandatory for the purchase or sale of shares of an unlisted company amounting to Rs.1 lakh.

(3) Amendment to Benami Property Prohibition Act 2016: by providing broader and clearer coverage and stricter penal provisions. 

(4) Demonetisation of Rs 500 and Rs 1000 notes:

This step will destroy black money held in the form of cash.

(5) Promotion of cashless transaction

Several efforts were made by the government and the RBI to encourage cashless transactions. Card based transactions or digital transactions automatically uploads transaction details under the PAN Card. Such a system will reduce the scope of black money.  National Payment Corporation’s Rupay Card, UPI, BHIM, Adhaar Enabled Payment System etc. are government initiatives for cashless transaction economy.

6. Operation Clean Money: Launched by CBDT to track black money accounts caught during the demonetisation period. 

7. Pradhan Mantri Garib Kalyan Yojana: Scheme for tackling blakc money revealed under the Demonetisation period. 

8. Putting limit on physical cash settlement. Exchange of cash above Rs 3 lakh has been prohibited. Similarly, banks can give only Rs 2 lakh through physical cash to customers.

9. Tax Administration measures: Aadhar -PAN linkage, TDS, Presumptive Taxation etc.

10. Constitution of the Special Investigation Team on Black Money.

11. The Central Economic Intelligence Bureau and Financail Intelligence Unit: were was set up with the intention to make economic intelligence, monitoring and fighting economic offences such as smuggling, money laundering tax evasion and fraud.

The CEIB is an important part of the Economic Intelligence Council which is responsible for coordination, strategy and information-sharing amongst the government agencies responsible for intelligence and control of economic offences such as smuggling, money laundering tax evasion and fraud. Finance Ministry is the nodal ministry for Economic Intelligence Council. 

12. Government imposed penalty on real estate cash transactions above Rs 20000. 

*********