21 May 2012

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Know important 48 Facts from White Paper on Black Money 2012 presented by Finance Minister in Lok Sabha

Know important 48 Facts from White Paper on Black Money 2012 presented by Finance Minister in Lok Sabha

Finance Minister Pranab Mukherjee on Monday tabled the government's white paper on black money in the Lok Sabha.

Below are the important 48 facts from the White paper on Black Money 2012 presented by finance Minister.

The Finance Minister, while responding to an adjournment motion on the ‘Situation Arising out of Money Deposited Illegally in Foreign Banks and Action Being Taken against the Guilty Persons’ in the Lok Sabha on 14 December 2011 gave an assurance that a white paper on black money would be prepared. This document is being presented to Parliament as a result.

The objective of this paper is to place in the public domain various facets and dimensions of black money

Black money is a term used in common parlance to refer to money that is not fully legitimate in the hands of the owner. This could be for 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. 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, comply with the tax requirements, or pay the dues to the public exchequer, leading to the generation of this wealth.

Defining ‘Black Money’ - For the purpose of this document, ‘black money’ can be 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.

This definition of black money 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, the NIPFP defined

‘Black income’ as ‘the aggregates of incomes which are taxable but not reported to the tax authorities’. Further, black incomes or unaccounted incomes are ‘the extent to which estimates of national income and output are biased downwards because of deliberate, false reporting of incomes, output and transactions for reasons of tax evasion, flouting of other economic controls and relative motives’.

7.    Factors Leading to Generation of Black Money - Black money arising from illegal activities such as crime and corruption has an underlying anti-social element. The ‘criminal’ component of black money may include proceeds from a range of activities including racketeering, trafficking in counterfeit and contraband goods, smuggling, production and trade of narcotics, forgery, illegal mining, illegal elling of forests, illicit liquor trade, robbery, kidnapping, human trafficking, sexual exploitation and prostitution, cheating and financial fraud, embezzlement, drug money, bank frauds, and illegal trade in arms. Some of these offences are included in the schedule of the Prevention of Money Laundering Act 2002. The ‘corrupt’ component of such money could stem from bribery and theft by those holding public office – such as by grant of business, leakages from government social spending programmes, speed money to circumvent or fast-track procedures, black marketing of price-controlled services, and altering land use regularizing unauthorized construction. All these activities are illegal per se and a result of human greed combined with eclining societal values and inability of the state to prevent them. Factors leading to their generation are both social and administrative.

These illegal activities are punishable under various Acts of the central and state governments which are administered by various law enforcement agencies.

Significant amount of black money, however, is generated through legally permissible economic activities, which are not accounted for and disclosed or reported to the public authorities as per the law or regulations, thereby converting such income into black money

Generally, a high burden of taxation, either actual or perceived, provides a strong temptation to evade taxes and generate black money

Culture and social practices may also play a vital role in deciding the preferences of citizens between tax compliance and black money generation.

Tax evasion involves misreporting or non-reporting of the transactions in the books of account.

Transactions that may result in taxation of receipts or income are not entered in the books of account by the taxpayer. The taxpayer either does not maintain books of account or maintains two sets or records partial receipts only. This mode is generally prevalent among the small grocery shops, unskilled or semi-skilled service providers, etc.

Parallel Books of Accounts:  This is a practice usually adopted by those who are obliged under the law or due to business needs to maintain books of account. In order to evade reporting activities or the income generated from them, they may resort to maintaining two sets of books of account – one for their own consumption with the objective of managing their business and the other one for the regulatory and tax authorities such as the Income Tax Department, Sales Tax Department, and Excise and Customs Department. The second set of books of account, which is maintained for the purpose of satisfying the legal and regulatory obligations of reporting to different authorities, may be manipulated by omitting receipts or falsely inflating expenses, for the purpose of evading taxes or other regulatory requirements.

Manipulation of Books of Account:  When books of accounts are required to be maintained by taxpayers under different laws, like the Companies Act 1956, the Banking Regulation Act, and the Income Tax Act, it may become difficult for these taxpayers to indulge in out of books transactions or to maintain parallel books of accounts. Such parties may resort to manipulation of the books of accounts to evade taxes.

Dummy / associated entity, there can be a plethora of possible arrangements entered into by such entities to aid generation of black money. In its simplest form, the associate entity may not report its activities or income at all. The main entity may show sales to such a dummy / associate entity at a lower price, thereby reducing its reported profits.

Manipulation of production figure is another means of artificially reducing tax liability

Since the income on which taxes are payable is arrived at after deducting the expenses of the business from the receipts, manipulation of expenses is a commonly adopted method of tax evasion.

The funds may be remitted to the account of the foreign taxpayer and the money can either be withdrawn in cash or remitted back to India in the form of non-taxable receipts. Such money may also be accumulated in the form of unaccounted assets of the Indian taxpayer abroad.

20. The increasing pressure on financial operators and banks to report cash transactions has also helped in curbing hawala transactions.

21. Christianaid  estimates that developing countries may be losing over US$160billion of tax revenues a year, primarily through transfer
pricing strategies.

The illicit money transferred outside India may come back to India through various methods such as hawala, mispricing, foreign direct investment (FDI) through beneficial tax jurisdictions, raising of capital
by Indian companies through global depository receipts (GDRs), and investment in Indian stock markets through participatory notes. It is possible that a large amount of money transferred outside India might
actually have returned through these means.

Various studies on tax havens have shown that tax havens are typically small countries/ jurisdictions, with low or nil taxation for foreigners who decide to come and settle there. They usually also offer strong confidentiality or secrecy regarding wealth and accounts, making them very attractive locations for safe keeping of unaccounted wealth. They also offer a very liberal regulatory environment and allow opaque existence, where an entity can easily be set up without indulging in any meaningful commercial activity

The FATF defines TBML as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt at legitimizing their illicit origins.

A Participatory Note (PN) is a derivative instrument issued in foreign jurisdictions, by a Foreign Institutional Investor (FII) / its sub-accounts or one of its associates, against underlying Indian securities. PNs are popular among foreign investors since they allow these investors to earn returns on investment in the Indian market without undergoing the significant cost and time implications of directly investing in India. These instruments are traded overseas outside the direct purview of SEBI surveillance thereby raising many apprehensions about the beneficial ownership and the nature of funds invested in these

There are no reliable estimates of black money generation or accumulation, neither is there an accurate well-accepted methodology for making such estimation

The Direct Taxes Enquiry Committee (Wanchoo Committee) followed the method adopted by Kaldor with some modifications. It estimated assessable non-salary income for the year 1961-62 at ` 2686 Crore
and non-salary income actually assessed to tax to be of the order of ` 1875 Crore. Accordingly the income which escaped income tax was of the order of ` 811 Crore. After making rough adjustments for exemptions
and deductions, the Wanchoo Committee found that ‘the estimated income on which tax has been evaded (black income) would probably be  ` 700 Crore and `  1000 Crore for the years 1961-62 and 1965-66
respectively’. ‘Projecting this estimate further to 1968-69 on the basis of percentage increase in national income from 1961-62 to 1968-69, the income on which tax was evaded for 1968-69 was estimated as ` 1800 Crore.

Rangnekar’s estimate: Dr D.K. Rangnekar, a member of the Wanchoo Committee, dissented from the estimates made by the Wanchoo Committee. According to him, tax-evaded income for 1961-62 was of
the order of ` 1150 crore as compared to the Wanchoo Committee’s estimate of ` 811 crore. For 1965-66, it was ` 2,350 crore against the ` 1000 crore estimated by the Wanchoo Committee. The projections for
1968-69 and 1969-70 were ` 2833 crore and ` 3080 crore respectively.

Chopra’s study estimated unaccounted income to have increased from `  916 crore in 1960-61, i.e. 6.5 per cent of gross national product (GNP) at factor cost, to ` 8098 crore in 1976-77 (11.4 per cent of GNP).

NIPFP Estimate of Black Money in India 1975-1983
Year   - Estimate for Black Money (' in crore) - Percent of GDP
1975-76  - 9,958 to 11,870 - 15 to 18
1980-81 - 20,362 to 23,678 - 18 to 21
1983-84  -31,584 to 36,784  -19 to 21

Suraj B. Gupta, a noted economist, pointed out some
erroneous assumptions in NIPFP study and estimated ‘black’ income at 42 per cent of GDP for the year 1980-81 and 51 per cent for the year 1987-88.

Arun Kumar pointed out certain defects in Gupta’s method as well as in the NIPFP study. He estimated ‘black’ income to be about 35 per cent for the year 1990-91 and 40 per cent for the year 1995-96.

The last official study for estimating black money generation was conducted at the behest of the Ministry of Finance by the NIPFP in 1985.

The World Bank Development Research Group on Poverty and
Inequality and Europe and Central Asia Region Human Development Economics Unit in July 2010 estimated ‘Shadow Economies’ of 162 countries from 1999 to 2007.
 It reported that the weighted average size of the shadow economy (as a percentage of ‘official’ GDP) of these 162 countries in 2007 was 31 per cent as compared to 34 per cent in 1999. For India, these figures were 20.7 per cent and 23.2 per cent respectively

A chain Email, which first started circulating on the Internet in early 2009, states that Indians have more money in the Swiss banks than all other countries combined. It claims that as per a Swiss Banking
Association report in 2006, bank deposits in the territory of Switzerland by nationals of a few countries are as under: India, US$1456 billion, Russia, US $470 billion, UK, US$390 billion, Ukraine, US$100 billion,
China, US$96 billion.

Another report which was circulated in the media stating that Indian nationals held around US$ 1.4 trillion abroad in illicit external assets was based on the 2008 report of Global Financial Integrity (GFI),
‘Illicit Financial Flows from Developing Countries: 2002-2006’

one estimate of the amount of Indian deposits in Swiss banks
(located in Switzerland) which has been made by the Swiss National Bank. Its spokesperson stated that at the end of 2010, the total liabilities of Swiss Banks towards Indians were 1.945 billion Swiss Francs (about
' 9,295 crore). The Swiss Ministry of External Affairs confirmed these figures when a reference was made by the Indian Ministry of External Affairs to them. Since the information was publicly available on the
website of the Swiss National Bank, the figures of earlier years were also taken and are tabulated in Annexure Table 1. From this Table, it can be seen that bank deposits of Indians in Swiss banks have decreased from ' 23,373 crore in year 2006 to ' 9,295 crore in year 2010.

An IMF study as reported by Rishi and Boyce (1990)  estimated the flight of capital from India during the period 1971-86 at US$20-30 billion, or US$1-2 billion every year. This estimate was later revised in
2001 to US$ 88 billion over the 1971-97 period, a sum that is roughly equivalent to 20 per cent of net real debt disbursements to the economy from 1971 to 1997.

November 2010: The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, which estimates that between 1948 and 2008,a total amount of US$ 213.2 billion has been shifted out of India through illicit outflows. After taking into consideration the rate of return on
external assets, it is estimated that the adjusted gross transfer of illicit assets by residents of India amounts to about US$ 462 billion as of end-December 2008. It has been further stated that if the size of India’s underground economy is estimated at 50 per cent of the GDP (US$
640 billion based on a GDP of US$ 1.28 trillion in 2008), roughly 72.2 per cent of the illicit assets comprising the underground economy is held abroad.

The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008’, GFI has estimated that from 1948 to 2008 a total of US$ 213.2 billion has been shifted out of India through illicit outflows. It
further estimates that after taking into consideration the rate of return on external assets, the adjusted gross transfer of illicit assets by residents of India amounts to about US$ 462 billion as of end-December
FDI statistics perhaps point to this fact. As per data released by the Department of Industrial Policy and Promotion (DIPP), from April 2000 to March 2011 FDI from Mauritius is 41.80 per cent of the entire
FDI received by India. In Annexure Table 4 the FDI equity inflows country-wise have been listed. It can be seen from this table that the two topmost sources of the cumulative inflows from April 2000 to March 2011 are Mauritius (41.80 per cent) and Singapore (9.17 per cent). Mauritius and Singapore with their small economies cannot be the sources of such huge investments and it is apparent that the investments are routed through these jurisdictions for avoidance of taxes and/or for concealing the identities from the revenue authorities of the ultimate investors, many of whom could actually be Indian residents, who have
invested in their own companies, though a process known as round tripping.

The Vodafone tax case provides an instance of the misuse of corporate structure for avoiding the payment of taxes. In this case, the Hutchison Group had made investments in India from 1992 to 2006
through a number of subsidiaries having ‘separate corporate personality’ but which were essentially post box companies based in the Cayman Islands, British Virgin Islands, and Mauritius. The Hutchison Group
sold its entire business operation in India in February 2007 to the Vodafone Group for a total consideration of US$ 11.2 billion and the same was effected through transfer of a solitary share of a Cayman Islands company. When the tax authorities requested the accounts of the said company, the answer given was that as per Cayman Islands law, the company was not required to prepare its accounts.

On 9 May, 2011 India became the 152  country to ratify the United Nations Convention against Corruption, which was signed on 9 December 2005.

On 5 May 2011, India ratified the United Nations Convention against Transnational Organized Crime (Palermo Convention), which was signed on 12 December 2002. The purpose of this Convention is to promote international cooperation in preventing and combating transnational organized crime more effectively. Under the Convention countries are to take measures against smuggling of migrants by land,
sea, and air as well as manufacturing and trafficking of firearms and ammunition. The Convention will help India get international cooperation in tracing, seizure, freezing, and confiscation of the proceeds of crimes under a wide range of mutual legal assistance clauses, even with countries with which it has no mutual legal assistance treaties.

India has signed the International Convention for the Suppression of the Financing of Terrorism on 8 September 2000 and ratified it on 22 April 2003. It requires each state party to take appropriate measures, in accordance with its domestic legal principles, for the detection and freezing, seizure, or forfeiture of any funds used or allocated for the purposes of committing the offences described, as well as take alleged offenders into custody, prosecute or extradite them, cooperate in preventive measures and countermeasures, and exchange information and evidence needed in related criminal proceedings.

Indian competent authority has received some useful information from competent authorities of other countries through DTAAs/TIEAs. On 18 March 2009, India was able to obtain information from the
German government regarding Indian taxpayers having accounts with LGT Bank in Liechtenstein. The information was immediately passed on to the Income Tax Department for appropriate action under the
Income Tax and Wealth Tax Act. Feedback in this regard from the Chief Commissioners of Income Tax reveals that on the basis of information received regarding certain trusts/ entities in the LGT bank, Liechtenstein, and beneficiaries therein, assessment proceedings were reopened and cases centralised in different central charges in Chennai, Delhi, Mumbai, and Kolkata. This resulted in assessments being
made in a total of 18 individual cases, being beneficiaries of the said trusts/entities, as per the provisions of the Income Tax Act 1961. The total assessed income in these cases was ' 39.66 crore and a total
demand of ' 24.26 crore was raised. Penalty proceedings for concealment of income have separately been initiated in all these cases and penalty amounting to ` 11.94 crore has been imposed in nine of the cases. Out of the 18 taxpayers one has passed away while prosecution has been launched against all 17 other taxpayers.

The information obtained from Germany is subject to the confidentiality provisions of the DTAA and may only be used for the tax purposes specified therein. Thus the contents of the information received from German tax authorities cannot be disclosed to persons other than those involved in income and wealth tax proceedings. This confidentiality provision is in line with similar provisions contained in both OECD and UN Model Tax Conventions. Notwithstanding this, names of the taxpayers against whom prosecution has been initiated have already become public. This is in accordance with the DTAA.

On the basis of information received from France so far in 219 cases, the department has detected undisclosed income totalling ` 565 crore and tax amounting to ` 181 crore has already been realized
The information was made available to India under Article 28 of
the India-France Convention. Under the DTAC, the source of information is not material. Once the information is shared under the DTAC, it is protected by the confidentiality clause of the DTAC. France
also took a written undertaking from India about maintaining the confidentiality of the information before handing it over

Suggested Reading –

Read complete white paper on Black Money 2012 tabled in Lok Sabha
By Finance Minister Pranab Mukherjee


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Monday, May 21, 2012

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