In common parlance, Black money is a term used to refer to money that is not fully legitimate in the hands of the owner. The term "black money" is not defined per se in the tax laws. However, a definition of black money was adopted in the White Paper issued on Black Money by Government of India in May 2012.
As per the above report, ‘black money’ is defined as assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.
Black money could arise broadly due to two possible reasons. The first is that the money may have been generated through illegitimate activities not permissible under the law, like crime, drug trade, terrorism, and corruption, all of which are punishable under the legal framework of the state. Some of these offences are included in the schedule of the Prevention of Money Laundering Act, 2002. Money laundering, as defined by Financial Action Task Force (FATF), is the processing of these criminal proceeds to disguise their illegal origin.
The second and perhaps more likely reason is that the wealth may have been generated and accumulated by failing to pay the dues to the public exchequer in one form or other. In this case, the activities undertaken by the perpetrator could be legitimate and otherwise permissible under the law of the land but s/he has failed to report the income so generated, or comply with the tax requirements, or pay the dues to the public exchequer, thereby converting such income into black money.
Thus, in addition to wealth earned through illegal means, the term black money would also include legal income that is concealed from public authorities
- to evade payment of taxes (income tax, excise duty, sales tax, stamp duty, etc);
- to evade payment of other statutory contributions;
- to evade compliance with the provisions of industrial laws such as the Industrial Dispute Act 1947, Minimum Wages Act 1948, Payment of Bonus Act 1936, Factories Act 1948, and Contract Labour (Regulation and Abolition) Act 1970; and / or to evade compliance with other laws and administrative procedures.
The definition of black money used in the White Paper is in consonance with the definition used by the National Institute of Public Finance and Policy (NIPFP)in its 1985 report on Aspects of Black Economy, wherein it defined ‘black income’ as ‘the aggregates of incomes which are taxable but not reported to the tax authorities’.
Because of deliberate, false reporting of incomes/output/ transactions national income and output of the country gets underestimated and hence, decisions based on such calculations tend to be faulty.
Black money lying abroad in foreign jurisdictions
The Finance Minister, in his budget speech of 2015-16, had conveyed the decision of the Government to enact a comprehensive new law on black money to specifically deal with black money stashed away abroad. In the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 later introduced in the Parliament on 20.03.2015, the words corresponding to black money is "undisclosed income and assets".
As per the Bill, “undisclosed asset located outside India” means an asset (including financial interest in any entity) located outside India, held by the tax assessee in his name or in respect of which he is a beneficial owner, regarding which he has no explanation about the source of investment in such asset or the explanation given by him is unsatisfactory in the opinion of the Assessing Officer; Further, “undisclosed foreign income and asset” means the total amount of undisclosed income of an assessee from a source located outside India and the value of an undisclosed asset located outside India, and computed in the manner as laid down in the said Bill. These definitions stands for black money lying abroad.
The Bill provides for separate taxation of any undisclosed income in relation to foreign income and assets. Such income will henceforth not be taxed under the Income-tax Act but under the stringent provisions of the proposed new legislation. Undisclosed foreign income or assets will be taxed at the flat rate of 30 percent. No exemption or deduction or set off of any carried forward losses which may be admissible under the existing Income-tax Act, 1961, will be allowed. The penalty for non-disclosure of income or an asset located outside India will be equal to three times the amount of tax payable thereon, i.e., 90 percent of the undisclosed income or the value of the undisclosed asset. This is in addition to tax payable at 30%. Failure to furnish return in respect of foreign income or assets shall attract a penalty of Rs.10 lakh. The same amount of penalty is prescribed for cases where although the assessee has filed a return of income, but he has not disclosed the foreign income and asset or has furnished inaccurate particulars of the same. Abetment or inducement of another person to make a false return or a false account or statement or declaration under the Act will be punishable with rigorous imprisonment from six months to seven years. This provision will also apply to banks and financial institutions aiding in concealment of foreign income or assets of resident Indians or falsification of documents.
The Bill received Presidential assent and became law on 26th May, 2015.The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules 2015 were notified on 2 July, 2015 vide (No. 58/2015). The Rules, inter-alia, specify the form and manner in which declaration of undisclosed foreign asset is to be made. Rules also provide the method of determination of fair market value of different types of assets e.g., bullion, jewellery, artistic work, shares and securities, immovable property, bank account etc.
Government has also introduced the Benami Transactions (Prohibition) Amendment Bill, 2015 to amend the Benami Transactions (Prohibition) Act, 1988 with a view to, inter alia, enable confiscation of Benami property (benami transaction means any transaction in which property is transferred to one person for a consideration paid or provided by another person) and provide for prosecution. Government also proactively engages with foreign governments with a view to facilitate and enhance the exchange of information under Double Taxation Avoidance Agreements (DTAAs)/Tax Information Exchange Agreements (TIEAs)/Multilateral Conventions. Government has joined the Multilateral Competent Authority Agreement in respect of Automatic Exchange of Information and having information sharing arrangement with USA under its Foreign Account Tax Compliance Act (FATCA). As on 30.06.2016, India has tax treaties (bilateral or multilateral) with 139 countries/ offshore jurisdictions.
On 10 May 2016 India revised its double taxation avoidance agreement with Mauritius to pave the way for imposing capital gains tax arising from alienation of shares acquired on or after 1 April, 2017 in a company resident in India with effect from financial year 2017-18, while simultaneously protecting investments in shares acquired before 1 April, 2017.Further, in respect of such capital gains arising during the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits Article (i.e., a resident of Mauritius (including a shell / conduit company) will not be entitled to benefits of 50% reduction in tax rate, if it fails the main purpose test and bonafide business test. A resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than Rs. 2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months.). Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards. In addition to this, interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31 March, 2017. These measures were taken to tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.
Unaccounted income in the domestic territory
Union Budget 2016-17 proposed a limited period Compliance window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset and clear up their past tax transgressions. This will include paying tax at 30% and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income. Regarding income declared in these declarations, there will be no scrutiny or enquiry under the Income Tax Act or the Wealth Tax Act and the declarants will have immunity from prosecution. Immunity from Benami Transaction (Prohibition) Act, 1988 is also proposed subject to certain conditions.Government of India plans to open the window under this Income Disclosure Scheme from 1st June to 30th September, 2016 with an option to pay amount due within two months of declaration.
Subsequent to the Income declaration scheme, as a step forward to curb black money, bank notes (currency) of existing series of denomination of the value of Rs.500 and Rs.1000 have been declared as not legal tender and is being withdrawn from circulation since the midnight of 8 November 2016. The Taxation Laws (Second Amendment) Bill, 2016 was introduced in the Parliament to amend the provisions of the Income Tax Act to ensure that defaulting assessees are subjected to tax at a higher rate and stringent penalty provision. Another amnesty scheme was also provided alongside the demonetization initiative. Further, in the Union Budget 2017-18, several measures are unveiled for curbing the flow /generation of black money, such as introduction of electoral bonds, abolition of cash payments above Rs. 3 lakh, putting a ban on cash donations above Rs. 2000 to political parties, plugging the loopholes in respect of manipulation of long term capital gains tax benefits etc. Details may be seen at Annexure III to Part B of the Budget Speech.
Central Board of Direct Taxes (CBDT) has started publishing the summary statistics on direct tax payments by individuals companies etc., which may be seen here.