BLACK MONEY WHITE PAPER M A Y 2 0 1 2 MINISTRY OF FINANCE DEPARTMENT OF REVENUE CENTRAL BOARD OF DIRECT TAXES NEW DELHI |ÉhÉ´É àÉÖJÉVÉÉÒÇ ÉÊ´ÉkÉ àÉÆjÉÉÒ, £ÉÉ®iÉ PRANAB MUKHERJEE FINANCE MINISTER INDIA Foreword In the past year the public discourse on the issue of corruption and black money has come in the forefront with the active participation of the civil society and our Parliamentary institutions. Two issues have been highlighted in this debate. First, several estimates have been floated, often without adequate factual basis on the magnitude of black money generated in the country and the unaccounted wealth stashed aboard. Secondly, a perception has been created that the Government’s response to address this issue has been piecemeal and inadequate. This document seeks to dispel some of the views around these two issues and place the various concerns in a perspective. The “White Paper on Black Money” presents the different facets of black money and its complex relationship with policy and administrative regime in the country. It also reflects upon the policy options and strategies that the Government has been pursuing in the context of recent initiatives, or need to take up in the near future, to address the issue of black money and corruption in public life. There is no doubt that manifestation of black money in social, economic and political space of our lives has a debilitating effect on the institutions of governance and conduct of public policy in the country. Governance failure and corruption in the system affect the poor disproportionately. The success of an inclusive development strategy critically depends on the capacity of our society to root out the evil of corruption and black money from its very foundations. Our endeavour in this regard requires a speedy transition towards a more transparent and result oriented economic management systems in India. The steps taken in recent years for simplifying and placing the administrative procedures concerning taxation, trade and tariffs and social transfers on UID based electronic interface, free of discretion and bureaucratic delays, are vital building blocks of the approach for tackling corruption and black money in our country. In this past year Government has brought five bills namely, the Lokpal Bill, the Judicial Accountability Bill, the Whistle Blowers Bill, the Grievance Redressal Bill and the Public Procurement Bill, which are at various stages of consideration by the Parliament. The institutionalisation and expansion of information exchange network at the international level is a major step in curbing cross-border flow of illicit wealth and in facilitating its repatriation. While these measures will set the tone for an equitable, transparent and a more efficient economy, there is much that we could do, both individually and collectively, to strengthen the moral fibre of our society. I would have been happy if I could have included the conclusions of reports of three premier institutions that have been tasked to quantify the magnitude of black money. These reports are likely to be received by the end of this year. However I have chosen to present this document now in response to an assurance given to the Parliament. Hopefully, it would contribute to an informed debate on the subject and a more effective policy response as we move forward. New Delhi 16 May 2012 (Pranab Mukherjee) Contents Chapter Particulars Page No. 1 INTRODUCTION 1 1.1 The Context 1 1.2 The Objective of this Paper 1 1.3 The Problem and its Complexities 1 2 BLACK MONEY AND ITS ESTIMATION 2 2.1 Defining ‘Black Money’ 2 2.2 Factors Leading to Generation of Black Money 2 2.3 Generating Black Money by Manipulation of Accounts 3 2.4. Generation of Black money in Some Vulnerable Sections of the Economy 6 2.5 Estimates of Black Money Generated in India 9 2.6 Estimates of Black Money Stashed Abroad 14 2.7 Illicit Money transferred outside India: Reports of the IMF and GFI 14 2.8 Has Money transferred abroad illicitly returned? 17 2.9 Misuse of Corporate Structure 18 2.10 Need for more research 18 3 INSTITUTIONS TO DEAL WITH BLACK MONEY 20 3.1 Introduction 20 3.2 Central Board of Direct Taxes 20 3.3 Enforcement Directorate 21 3.4 Financial Intelligence Unit 22 3.5 Central Board of Excise and Customs and DRI 23 3.6 Central Economic Intelligence Bureau 23 3.7 Other Central Agencies 24 3.8 CBI and Police Authorities 26 4 TACKLING THE MENACE OF BLACK MONEY: THE FRAMEWORK 27 4.1 Evolution of Strategies to Control Black Money in India 27 4.2 Joining the Global Crusade against Black Money 28 A. India’s actions through the G20 28 B. Global Forum 29 C. Multilateral Convention on Mutual Administrative Assistance in Tax Matters 30 D. Financial Action Task Force 30 (i) Chapter Particulars Page No. E. United Nations Convention against Corruption 30 F. United Nations Convention against Transnational Organized Crime 31 G. International Convention for the Suppression of the Financing of Terrorism 31 H. United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 31 I. Egmont Group 31 4.3 Creating an appropriate legislative framework 32 A. Strengthening Direct Taxes provisions including those relating to International Taxation and Transfer Pricing 32 B. Creating network of DTAAs and TIEAs as per International Standard 34 C. Prevention of Money Laundering Act 35 D. Prevention of Benami Transactions 36 E. Public Procurement Bill 36 F. Prevention of Bribery of Foreign Officials Bill 37 G. Lokpal and Lokayukta Bll 37 H. Citizens’ Grievance Redressal Bill 37 I. Judicial Standards and Accountability Bill 38 J. Whistleblower’s Bill 39 K. Direct Payment into Bank Accounts of Payees 39 L. Unique Identity (UID)-Aadhaar 39 M. Amendments to the NDPS Act 39 4.4 Setting up Institutions for Dealing with Illicit Money 40 A. Directorate of Criminal Investigation 40 B. Cell for Exchange of Information 40 C. Income Tax Overseas Units 41 D. Strengthening the FT & TR Division inthe CBDT 41 E. Strengthening of Investigation Division of the CBDT 41 4.5 Developing a System for Implementation 42 A. Integrated Taxpayer Data Management System (ITDMS) and 360-degree profiling 42 B. Setting up of Cyber Forensic Labs and Work Stations 42 C. CAIT for Focused Investigation 42 D. Goods and Services Tax Network (GSTN) 42 E. Committee of Black Money 42 4.6 Imparting Skills to the Personnel for Effective Action. 42 4.7 Results Achieved 43 A. Large Network of DTAAs and TIEAs 43 B. Information Received from Abroad under DTAAs and TIEAs 43 C. Action by the Investigation Wing 47 D. Prosecution under Income Tax Act 47 (ii) Chapter Particulars Page No. E. International Taxation and Transfer Pricing 48 F. Information disseminated by the FIU 49 G. Cases under the PMLA 50 5 THE WAY FORWARD 51 5.1 Introduction 51 5.2 Strategies for Curbing Generation of Black Money from Legal and Legitimate Activities 51 A. Reducing Disincentives against Voluntary Compliance 51 A.1 Rationalization of Tax Rates 51 A.2 Reducing Transaction Costs of Compliance and Administration 52 A.3 Further Economic Liberalization 52 B. Reforms in Sectors Vulnerable to Generation of Black Money 53 B.1 Financial Sector 53 B.2 Real Estate 53 B.3 Bullion and Jewellery Sector 55 B.4 Cash Economy 55 B.5 Mining and Allocation of Property Rights over Natural Resources 56 B.6 Equity Trading 56 B.7 Misuse of Corporate Structure for Generation of Black Money 56 B.8 Non Profit Organisations and the Cooperative Sector 57 C. Creation of Effective Credible Deterrence 57 C.1 Integration of Databases Leading to Actionable Intelligence by Monitoring Agencies 57 C.2 Strategies to Strengthen Direct Tax Administration 58 C.3 Strengthening of the Prosecution Mechanism 60 C.4 Enhanced Exchange of Information 60 C.5 Income Tax Overseas Units 61 C.6 Efforts to be undertaken at International Forums 61 C.7 International Taxation and Transfer Pricing 61 C.8 Effective Curbing of Structuring through Tax Havens 61 C.9 Strengthening of Indirect Tax Administration 62 C.10 Strengthening of FIU-IND 62 C.11 Strengthening of CEIB 62 C.12 Strengthening of Other Institutions 62 C.13 Other Steps to Curb Generation of Black Money within India 63 D. Supportive Measures 63 D.1 Creating Public Awareness and Public Support 63 D.2 Enhancing the Accountability of Auditors 63 D.3 Protection to Whistleblowers and Witnesses 64 D.4 Need to Join International Efforts and Use International Platforms 64 (iii) Chapter Particulars Page No. D.5 Need to Fine-tune Relevant Laws and Regulations 64 D.6 Strengthening of Social Values 65 5.3 Strategies for Curbing Generation of Black Money through Illegal or Criminal Activities 65 A. Organised Crime 65 B. Corruption 65 C Other Criminal Activities that lead to Significant Black Money 66 5.4 Strategies for Repatriation of Black Money Stashed Abroad and Issues Related to Confidentiality of Information 66 A. Repatriation of Black Money Stashed Abroad 66 B. Voluntary Disclosure Schemes and Tax Recovery 67 C. Agreement between Countries for Revenue Sharing 67 D. Confidentiality of Information under DTAAs/TIEAs 68 List of Abbreviations 94 List of Tables Table No. Particulars Page No. 2.1 NIPFP Estimate of Black Money in India 1975-1983 12 2.2 Variations in Estimates of Black Income 13 4.1 Tax-related Information about Indian Taxpayers from Abroad 44 4.2 Requests from Field Officers to Foreign Tax Authorities 45 4.3 Search and Seizure Statistics 2006-2012 47 4.4 Number of Surveys Conducted and Undisclosed Income Detected 2006-2012 47 4.5 Number of Complaints Filed, Convictions, Compounding of Offences, and Success Rate 2005-2012 48 4.6 Collection from Cross-border Transactions 2002-2012 48 4.7 Transfer-pricing Adjustments 2004-2012 49 4.8 Year-wise Details of Number of STRs Disseminated by the FIU-IND 2006-2012 49 4.9 Year-wise Break-up of Requests for information from Intelligence and Law Enforcement Agencies 50 4.10 Year-wise Break-up of Requests Made to Foreign FIUs 2006-2012 50 List of Boxes Box No. Particulars Page No. 2.1 Characteristics of Tax havens 8 2.2 Participatory Notes 9 (iv) Box No. Particulars Page No. 4.1 Information from Canada on Gifts 45 4.2 Evidence Found during Search Operations Supplemented by Information Received from Abroad 45 4.3 Spontaneous Exchange of Information from Japan 46 List of Figures Figure No. Particulars Page No. 2.1 Manipulations of Accounts for Tax Evasion 4 List of Annexes Annexes No. Particulars Page No. 1 Offences as Listed in the Schedule of the PMLA 70 2 Text of G20 Communiques 72 3 Recommendations of the Committee headed by Chairman, CBDT on Black Money 74 A. Preventing generation of black money 74 B. Discouraging use of black money 75 C. Effective detection of black money 76 D. Effective investigation & adjudication 78 E. Other steps 80 Annexure TABLES 81 Table 1 Liabilities of Swiss Banks towards Indians 81 Table 2 Liabilities of Swiss Banks – All Countries 82 Table 3 Illicit Flow, GFI Report, December, 2011 83 Table 4 Share of Top Investing Countries FDI Equity Inflows 84 Table 5 List of Countries that Have Signed and ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters 85 Table 6 Summary of New Swiss Treaties 86 Table 7 List of DTAAs/TIEAs in force/under negotiation 87 (v)