The wrong prongs

Draconian strategy on black money ill-advised

The Union Cabinet has cleared the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, generally known as the black money Bill, for introduction in Parliament this session. This bill is one prong of the government's two-pronged assault on untaxed pools of money, the other - as announced by Finance Minister Arun Jaitley in the Union Budget - being an updated version of the Benami Transactions (Prohibition) Bill. The former law will deal with black money abroad; the latter with attempts to conceal it domestically.

The government's intent is laudable. The hunt for black money has long been a politically salient activity, and Prime Minister Narendra Modi had focused on it during his campaign. One of his Cabinet's first acts was to set up a committee to investigate the issue. But there are significant problems with the mechanism that is now being proposed. First of all, the version of the Bill cleared by the Cabinet suggests a one-month long window of opportunity for individuals to disclose their hidden money kept abroad and such disclosures would allow them to escape prosecution after paying taxes and penalty. The government has said that this window of opportunity for offenders is not like an amnesty or immunity scheme. However, whatever name it may be given, this is likely to have a negative effect on the incentives of tax evaders. Such a scheme is likely to create a moral hazard and, therefore, should be avoided.

However, even more worrying are the draconian punishments being suggested under this bill. Those who conceal income and assets could get ten years' rigorous imprisonment. They will not be permitted, under law, to approach the Settlement Commission to resolve these disputes with the taxman. Enforcement agencies will be empowered to confiscate assets in the course of their investigation. Even the filing of returns with inadequate information - note, of course, the definition of "inadequate" could be entirely arbitrary and up to the individual tax assessment officer - could result in seven years' rigorous imprisonment. These are very strong provisions indeed, and it is far from certain that they have been properly thought through. They place a great deal of faith in the efficiency and probity of every single official of the tax authorities. Worse, because of the political sensitivity of black money, it would be a brave politician who would call attention to the problems in this proposed law. In other words, although the black money Bill is likely to head to a committee where parliamentarians will study it, there is little hope that the committee will find itself able to rationalise some of these provisions.

Unfortunately, neither this law nor the domestic-focused law really deals with the real issues at hand. The government's strategy for curbing black money does not deal with the problem of its generation; nor does it contain strategies to check black money's movement across borders. Will punishment and threats alone be truly effective? Remember the concealment of taxable income, including of foreign taxable income is already punishable - by seven years' imprisonment if the tax evaded is higher than Rs 25,000. However, there are few instances of offenders having been sentenced to these seven years under these provisions of the existing law. Essentially, the thrust of the government's black money strategy needs to be refocused as the proposed law will only give an additional lever to the taxman. Instead, it would be well-advised to focus on regulation and transparency in the sectors that create black money, like real estate. And it should shut down the mechanisms, such as the "Mauritius route", that serve to disguise the movement of black money across borders.