On black money trail

T. C. A. Ramajujam | Updated on March 22, 2011 Published on March 19, 2011

The government relies heavily on transfer pricing as an efficient mechanism to preventvhe key will lie in the implementation of the Budget proposals.

“Where is Trust?

Lost in hypocritical courtesies.

Where is courtesy?

Lost in futile investigations.

The cycles of tax decades have brought the Indian rupee.

Nearer the Swiss bank and farther from the Indian treasury”

(With apologies to T.S.Elliot, British Poet Laureate)

In Para 85 of the Budget speech, the Finance Minister announced measures to deal with the problem of generation and circulation of black money effectively.

Apart from joining the global crusade against the black money, an attempt has been made to create an appropriate legislative framework for dealing with illicit funds. India is now a Member of the Financial Action Task Force (FATF) and is also part of the Global Forum on Transparency and Exchange of information for tax purposes.

The scope and application of the money laundering legislation has been significantly increased.

The Finance Minister announced that a sum of over Rs 100 crore has been unearthed as black money in recent months.

The Finance Ministry believes that the powers of searches and seizures will prove useful in the fight against the black money. The accompanying chart will show the effectiveness of the tool. The Chart does not explain how much of these figures ultimately led to successful detection of black money.

An estimated sum of $462 billion of black money has moved out of India between 1948 and 2008, mostly into tax havens, according to Mr Dev Kar, a leading economist with global financial integrity. and much of this has gone into tax havens.

OECD released a tax standard approved by the UN and G-20 nations. If the Indian Government seeks specific information from the so-called tax havens, the foreign territories are obliged to respond favourably. Some of the tax havens are given in the Table

We have DTAAs with all these territories and also Tax Information Exchange Agreements, except with countries such as Luxembourg, Liechtenstein, Singapore and Seychelles. An agreement is under process with Switzerland.

New section

Finance Bill 2011 proposes to discourage transactions by resident assessees with persons located in foreign jurisdictions which do not effectively exchange information with India. A new Section 94A is being inserted in the Income Tax Act, 1961 enabling the Central Government to notify any country or territory outside India for purposes of disallowance of transactions with entities in those countries in the tax assessment of the resident assessee.

The parties to the transaction shall be deemed to be associated enterprises. Transfer pricing regulations shall be applied to such transactions.

The resident assessee is bound to furnish authorisation in favour of the Indian income tax authority to seek relevant information in respect of any payment made to a financial institution in such territories.

In the absence of such authorisation, deduction will be denied for such payment made in the Indian tax assessments. Deduction will also be denied in respect of any other expenditure or allowance including depreciation arising from the transaction with a person located in a notified jurisdictional area, unless the Indian taxpayer furnishes the prescribed information.

Amounts received from a person located in the notified jurisdictional area will have to be treated as unproved if there is no proof for the source of such money. Similarly, payments made shall be liable to deduction of tax at the higher of the rates specified in the Act or a rate of 30 per cent. These amendments take effect from June 1, 2011.

More powers for TPOS

The Finance Bill grants additional powers to Transfer Pricing Officers to determine the Arms Length Price even in respect of transactions that they may subsequently come across during the course of proceedings before them. This way, disputes regarding jurisdictions of TPOs to examine transactions not specifically referred to them will be avoided.

TPOs can always hereafter exercise the power to survey and conduct on the spot verification and enquiry. The amendments override the law stated regarding jurisdiction in cases like ‘Amadeus Spain'.

The Finance Bill does not carry any mechanism for bringing in safe harbour rules.

The government relies heavily on transfer pricing as an efficient mechanism to prevent tax evasion. The key will lie in the implementation of these measures.

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

Published on March 19, 2011
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