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How the rich are building a defence against the black money law

Multi-level trust structures, change of residency among measures planned

Dev Chatterjee & Sudipto Dey  |  Mumbai/New Delhi 

With the September-end deadline to disclose unaccounted money fast approaching, India's top moneybags are planning multiple-level trust structures, change of residency, and even transferring assets to third parties abroad, to escape what they refer to as a draconian law. Tax lawyers say lack of immunity from prosecution is a big negative in the law, discouraging many to come clean on their unaccounted wealth.

"Many are of the view that even after paying 60 per cent tax and penalty, if there is no immunity from prosecution, it is better to take the risk of the government finding out their assets abroad. Many are even ready to litigate for the rest of their life in India and abroad, if the department ever finds out," said a tax lawyer, who did not wish to be named. "Everyone is worried about the harassment after September," said another lawyer from one of the 'big four' auditing firms. "This black money law will just lead to increased litigation between the government and the taxpayers," he added.

"The new black money law has a lot of gray areas. This could lead to subjectivity, and, in some cases, abuse of discretionary powers. More tightly-defined criteria, rules and safeguards are needed for the law to be trusted," said Cyril Shroff, managing partner, Cyril Amarchand Mangaldas.


Even though the industry and tax consultants are still trying to understand the thought process of Central Board of Direct Taxes (CBDT) as they go about implementing the Black Money (Undisclosed Foreign Income And Assets) and Imposition of Tax Act, 2015, chartered accountants say the biggest concern is that unintentional errors in disclosing foreign income or assets could lead to heavy penalties for the assessees in future. According to Manoj Fadnis, president, Institute of Chartered Accountants of India (ICAI), there is a need for procedural clarifications that cannot be captured in the rules.

Tax experts point out that while some assessees with undisclosed foreign assets or income have initiated the process of getting their documentation from foreign countries where they hold assets or bank accounts, some are also testing out the loopholes in the law.

"Tax havens, nominee-based structures, combined with lack of information about beneficial ownership of corporates in various foreign jurisdictions are the Achilles heel of the black money law," says Jagvinder Brar, partner, forensics, KPMG in India.

The Act does not distinguish between beneficial ownership of public and non-public companies and there are gray areas around control of companies, said a chartered accountant. From the enforcement point of view, there are limitations to obtaining backdated information from foreign banks or governments.

"Countries may decide to share just recent data, not backdated information. This puts a limit on enforcement," added a tax expert. Further, some tax havens may not willingly disclose information related to undeclared assets and income, unless forced to through political pressure, say experts.

Tax experts say some are looking at bringing back the money stashed abroad through routes such as foreign direct investment, external commercial borrowing, or instruments such as loans and gifts. Chartered accountants point out that the financial structures that companies resort to are designed to get maximum tax optimisation, keeping in mind the benefits of double tax avoidance agreements between different jurisdictions. "Each structure is unique, set to conditions under which a company is operating," says Fadnis. The ICAI had advised its members to go through the rules of the Act with a fine-toothed comb, and understand the business dimensions for their client and see to it that proper disclosures are made, said Fadnis.


'GRAY' MATTER

Compliance scheme
  • Taxpayers will have to pay 30 per cent tax and a penalty equal to the total tax levied on undisclosed foreign assets. Disclose assets by September-end
  • The tax and penalty have to be paid by December this year. The income tax department has to give an acknowledgment to the taxpayer within 15 days (by January 15, 2016)
  • The declaration made by the taxpayer in this regard will not be used as evidence for prosecution under the Foreign Exchange Management Act, I-T Act, Wealth Tax Act, Companies Act, or Customs Act
  • No immunity if the funds are later found to be unlawful gains
Moneybags fight back
  • Want immunity from all prosecution
  • Setting up multi-level trusts to obscure identity
  • Tax evaders are migrating to Dubai, the UK, Singapore, Hong Kong
  • Ready for litigation with the government
  • Transfer assets to third party based abroad

First Published: Tue, August 11 2015. 00:49 IST
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