Tracking black money

T. C. A. RAMANUJAM | Updated on April 28, 2011 Published on April 23, 2011


A synchronisation of the tax law, the company law and the money laundering law is needed to prevent the generation of black money.

Black Money is a flow, and not a fund. This well-established truism has to be thought over again and again for the implications of the statement. Black money is generated constantly and goes on accumulating in hidden places apparently beyond the reach of the taxman. Half a century of after the Income -Tax Act 1961 came into force, Government is still groping in the dark to find ways and means of preventing generation of black money. What is needed is a close link between the tax law, the company law and the money laundering law.

Beneficial Owner

The ownership of shares in companies can reveal a lot about the sources of investment. Quite often it happens that the real beneficial owner hides behind the cloak of the registered shareholder. Our tax law treats the registered owner of the share as the real owner.

The stray reference to the beneficial owner is to be found in Section 45 of the Income-Tax Act which in turn refers to the definition in the Depositories Act 1996. Not much help can be derived from the definition given in the Depositories Act.

It defines a beneficial owner “as a person whose name is recorded as such with a depository”. Even the Company Law is not of much help. The Securities Contract Act makes vague reference to the term, but it is not clearly defined.

Giant companies are known to hide the real beneficiaries behind complicated ownership structures spread over small tax havens across the globe. India is now a member of the International Financial Action Task Force (FATF). There is therefore an urgency to move with Western nations with regard to our own legal definitions. The Finance Ministry had set up an inter-Ministerial group to go into the drafting of the Company Law with particular emphasis on the definitions of shareholder.

The Group has recommended that company officials and auditors should be made available to disclose the true identity of those exercising control over the assets of the company. There is need for a proper definition of the term ‘beneficial owner' so as to take in those with controlling interest and representing the mind and management of the company.

Blank transfers

Courts are often at loggerheads in trying to lift the corporate veil to find out the real owner. Currently, there is no obligation on the company to obtain, verify and retain records of beneficial ownership and control in companies. At this moment, the Company Law appears to permit even blank transfers. This should stop.

The Government amended the Prevention of Money Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. The fresh Notification dated February 12, 2010 inserts an Explanation in Rule 9(1A).

As per this Explanation, “Beneficial Owner' shall mean the natural person who ultimately owns or controls a client and or the person on whose behalf a transaction is being conducted, and includes a person who exercises ultimate effective control over a juridical person”. There is no reason why this enlarged definition should not find a place in the Direct Taxes Code to be.

At present, the PAN application form or the tax return form do not call for details of adult co-parceners of the Hindu Undivided Family (HUF). It is well known that the HUF is the source of large-scale mitigation. The same is true of trust. The Trust Act casts no obligation on the trustees to furnish information about the beneficial owner of trusts.

A stringent definition of the concept of beneficial ownership both under the Company Law and the Trust Act will enable the Tax Department to find out the real source of investments, both within India and from outside.

At present, our tax authorities have no way of finding out in many cases how Mauritius accounts for 40 per cent of foreign direct investment into India. A common belief is that Indian money is re-routed through Mauritius for tax gains. A probe into the owning patterns of the investors will bring out the real persons behind the deals.

Even as the DTC is being launched shortly, the Government is also moving the Company Law bill. An attempt should be made to synchronise the Income Tax Act and harmonise the concepts in both the laws so that loop holes are plugged. It is also necessary that the Tax Department takes into account the provisions of the money laundering law.

At the moment it looks as though our own laws aid the generation of black money.

(The author is a former Chief Commissioner of Income-Tax.)

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Published on April 23, 2011
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